ANNUAL REPORT 2008 Terra BoligKreditt AS

Transcription

1 ANNUAL REPORT 2008 Terra BoligKreditt AS

2 Financial Highlights 2008 Pre-tax operating revenues were NOK 8.6 million in 2008, vs NOK -7.9 million in Total lending reached NOK 12,099 million, an increase of 34 per cent since the end of Total borrowing was NOK 15,856 million, an increase of 70 per cent since the end of Net interest income in 2008 is NOK 71.8 million, an increase of 57 per cent since the previous year. The capital adequacy ratio at the end of 2008 was per cent, as against per cent at the end of Page 2 of 29

3 Report of the Board of Directors 2008 of Terra BoligKreditt AS Introduction Ownership structure and nature of business Terra BoligKreditt AS is licensed as a credit institution and is entitled to issue covered bonds (CB). The company was established on 24 March 2003, and commenced its lending operations on 15 February The company's objectives are to cover a substantial part of the funding needs of the savings banks in the Terra alliance, while also reducing the future refinancing risks for the banks. Terra BoligKreditt AS is a fully owned subsidiary of Terra- Gruppen AS, which is owned by 78 Norwegian savings banks. The company exclusively offers residential mortgages within 60 per cent of the collateral value (Loan To Value), and the loans are distributed through the savings banks in the Terra alliance. Growth in mortgage portfolio At 31 December 2008, Terra BoligKreditt AS had a mortgage portfolio of NOK 12.1bn, which represents a net increase of NOK 3.0bn, or 34 per cent, from the same date in In 2008, the company increased the number of mortgage customers by 2,683, and had 10,132 mortgage customers at year-end. Best rating Since it was awarded a rating in 2007, Terra BoligKreditt AS has maintained an Aaa, which is the best obtainable rating for the company's covered bonds. The bonds are rated by the international rating agency Moody s Investors Service. Access to the international financial market Since Terra BoligKreditt AS was licensed to issue covered bonds in 2007, the company has issued bonds both in the Norwegian and the international financial markets. In 2008, the company issued a total of NOK 8.9bn in new borrowing and at year-end 2008 total borrowing was NOK 15.9bn. A best rating for the bonds, along with stable growth and no defaults in the loan portfolio, have led to good results from the issues conducted in In the spring of 2008, the company conducted a major bonds issue of some NOK 4bn in the Euro market. This has enabled Terra BoligKreditt to secure the Terra banks access to financing in the international market, and will also protect the banks against fluctuations in the domestic monetary market. Terra BoligKreditt AS issues covered bonds under the company's 3,000,000,000 Euro Medium Term Covered Note Programme, which is listed on the London Stock Exchange. On 13 August 2008, Terra BoligKreditt AS undertook an annual audit of the lending programme. Page 3 of 29

4 The swap arrangement Under the current financial crisis, covered bonds have acquired a central position in the fiscal stimulus packages the Norwegian authorities have presented to the financial services industry. On 24 October 2008, the Norwegian Parliament adopted a swap arrangement of NOK 350bn under which the State and the banks exchange covered bonds for government securities. This arrangement grants the banks access to government securities that may be traded for liquidity in the financial markets. Towards the end of November 2008, the Norwegian Ministry of Finance expanded the arrangement to enable bank-owned issuers of covered bonds, such as Terra BoligKreditt AS, to participate directly in the swap arrangement. The banks may also use the company's bonds as collateral for loans from Norges Bank (the central bank of Norway). In 2008, the domestic and international money markets suffered severe market effects in relation to both prices and liquidity. This situation has persisted into The established swap arrangement with the Norwegian State, and the lending facilities provided by Norges Bank, have nonetheless secured Terra BoligKreditt AS and the banks a good, stable funding situation. Profit and loss account Revenues The company's total interest income in 2008 amounted to NOK 897 million, representing an increase of NOK 498 million or 125 per cent from Net interest income Net interest income in 2008 amounted to NOK 72 million, which is an increase of 57 per cent from The turmoil in the financial markets escalated considerably through the autumn of From record high levels the credit risk margins for the players in the financial market have risen even further. Although the increase for issuers of covered bonds has been moderate, the outcome in credit spreads has nonetheless been considerable. Approximately 94 per cent of the mortgage loans in the loan portfolio of Terra BoligKreditt AS have a variable rate of interest. This enables the company to adjust the lending interest rate in keeping with interest rate fluctuations in the market. If the interest rate on the loan increases, the company is obliged to notify the borrower no less than six weeks before the increase becomes effective. From a peak rate in 2008 of 7.91 per cent, the money market interest rate (3 months' Nibor) fell sharply towards the end of the year, and stood at 3.97 per cent at the end of The drop in the money market rate has continued into 2009, and is approximately 3.5 per cent at the beginning of February Balance Sheet and liquidity Balance sheet Assets in the company's balance sheet amounted to NOK 16,612 million at year-end 2008, an increase from NOK 9,819 million the year before. Net lending to customers has increased by NOK 3,037 million or 34 per cent since year-end Page 4 of 29

5 Borrowing At the end of 2008, the company's total borrowing was NOK 15,856 million, representing an increase of 70 per cent since the end of The table below provides a breakdown of the company's borrowing into various instruments. Amounts in NOK million 31 Dec Dec 2007 Covered bonds 13,945 4,656 Other bond debt 1,442 2,248 Certificates/short-term borrowing 210 2,315 Subordinated loan capital Total borrowing 15,856 9,339 Liquidity In a situation marked by strong fluctuations in the financial markets, it has been important for the company to maintain good liquidity preparedness. Consequently, the company has decided to maintain a solid liquidity reserve in line with the continuing escalation of the financial crisis through 2008 and into Through the autumn of 2008 it became evident that the problems that had persisted for some time in the international financial markets had also started to appear in the Norwegian money market. The lack of trust between the players deteriorated further, and towards the end of the third quarter of 2008 the Norwegian money market virtually stopped functioning. At the time, future developments in the money market appeared so uncertain that the company decided to limit the banks' lending. As is known, the authorities have put into effect a number of initiatives to improve the liquidity of the players in the financial services industry. Norges Bank has accepted new assets as deposit security for the so-called D and F loans, while the maximum term to maturity for F loans has been increased from one week to two years. As mentioned above, the Norwegian Parliament has also adopted a swap arrangement under which banks and issuers of covered bonds may swap these for government securities. The liquidity effect arises from the government securities being regarded as attractive instruments in the current financial crisis which can be traded in the market to obtain liquidity. In line with the measures initiated by the authorities, during the autumn of 2008 a number of the savings banks in the Terra alliance began buying covered bonds from Terra BoligKreditt AS to use as deposit security for F loans from Norges Bank. This enabled the savings banks to secure credit facilities for lending via Terra BoligKreditt AS, while Terra BoligKreditt AS was secured the funding for new lending. Since Terra BoligKreditt AS is an issuer of covered bonds and owned by the savings banks, the company is entitled to participate directly in the swap arrangement with the State. Consequently, the company implemented various initiatives in 2008 that will enable it to enter into direct swap agreements with the State. The auctions to determine the price of the swap agreements that were carried out in 2008 and the beginning of 2009 indicate beneficial levels of credit spread in the swap agreements. The company therefore plans to participate in auctions from March 2009 inclusive, with the aim of entering into direct swap agreements. Page 5 of 29

6 Outlook The financial turmoil that started in the USA has gradually impacted on both individuals and businesses in Norway. Despite the downward trend in interest rates towards the end of 2008, the uncertainty related to the labour market and to people s own personal finances led to a reduction in personal consumption and the desire to invest. Companies have noted a fall in demand for goods and services, while also experiencing severe curtailment of access to capital and liquidity. Such changes in the trading pattern have had macro-economic effects, with value creation reduced and unemployment rising. There is reason to assume that the experience of an economic downturn will cause a fall in demand for new mortgages with our distribution banks in 2009 compared with previous years. Nonetheless, Terra BoligKreditt anticipates stable growth in its loan portfolio in Recent events have strengthened the company's position as a strategically important tool for the savings banks in the Terra alliance with regard both to relieving their own need for funding and reducing their liquidity risk. The current difficult situation in the money market has also resulted in Terra BoligKreditt AS being able to raise new loans at advantageous interest rates compared with the bank's own external financing. Direct participation in the swap arrangement will further strengthen Terra BoligKreditt AS competitive power in the time ahead and also constitute a reliable source of borrowing with regard to both borrowing costs and liquidity. Participation in the swap arrangement means that the company will have the necessary power of growth to act as a de facto relief channel to the banks in It is therefore expected that, in the time ahead, the banks will to an even greater degree use Terra BoligKreditt AS to provide relief for their own lending growth. Risks and capital adequacy ratio In order to maintain a good capital adequacy ratio in relation to the growth in the loan portfolio, the company has completed two share issues with the Terra-Gruppen AS in Total subscribed capital amounted to NOK 160 million. The share issues were conducted in April and September In addition, in March 2008 the company raised a new subordinated loan of NOK 139 million with a term to maturity of years. At the end of 2008, the company s equity and subordinated loan capital totalled NOK 825 million. Terra BoligKreditt's operations are limited solely to mortgage lending with security of up to 60 per cent of collateral value. In line with the growth in total lending, the calculation basis for the capital adequacy ratio has increased correspondingly, amounting to NOK 4,960 million at year-end This amount is a quantification of the company's risk, and the company's equity and subordinated loan capital is calculated as an economic variable in relation to this calculation basis. At the end of 2008, the company's total equity and subordinated loan capital constituted a capital adequacy ratio of per cent. The table below indicates developments in the capital adequacy ratio. Amounts in NOK million 31 Dec Dec 2007 Weighted calculation basis 4,960 4,160 Equity and subordinated loan capital Capital adequacy ratio as a percentage 16.63% 12.60% Page 6 of 29

7 Risk exposure Activities in Terra BoligKreditt AS are exposed to various forms of risk. The company emphasises and makes continuous efforts to manage and control risk exposure. The Board of Directors has approved the implementation of the Terra-Gruppen's framework for risk management and control. This framework, based on the Basel II regulations, defines the risk willingness and principles for managing risk and capital. The company's profit goal is to achieve a competitive return on equity. The risk management will contribute to the attainment of this goal through the exploitation of business opportunities and by reducing the risk of possible negative results. Internal control systems are implemented in the company, and routines and instructions have been developed in connection with risk reviews to ensure the company handles various risk factors in a satisfactory manner. Risk management is periodically monitored to ensure that routines are complied with and are functioning as required. The company's business is exposed to the following risks: credit risk, market risk, operational risk, liquidity risk and business risk. Credit risk The company is exposed to credit risk by granting credit to its customers. The credit risk is primarily linked to lending with property as collateral. The giving of credit is managed through credit policies and the credit manual, and by following the administrative approval procedures and a well developed set of rules for procedures and documentation. The portfolio risk is continuously monitored in order to reveal possible default and to ensure a quick and adequate handling of non-performing loans and advances. The risk of loss is further reduced through guarantees from all the banks that distribute the loans. The company had no losses on lending or guarantees in The company maintains a conservative credit policy and expects no changes in future credit risk. Market risk The company is exposed to interest rate risk both through financial investments in interestbearing securities and interest rate risk related to net interest income. Risk associated with net interest income arises due to different fixed interest terms on borrowing and lending, and due to the company borrowing from different markets than those it lends to, so that the borrowing interest rate is changed without the company being able to adjust the lending rate equally quickly. The risk is reduced by coordinating the fixed interest term on deposits and loans. Operational risk This type of risk and source of loss is linked to day to day operations, such as failures in systems and routines, insufficient skills or mistakes made by suppliers, staff, etc. The company reduces operational risk by means of well-defined routine descriptions, formal approval procedures and clearly defined individual responsibility. The company has also put in place relevant insurance schemes and appropriate contingency plans to handle emergencies. Liquidity risk There is a liquidity risk associated with the business. The liquidity risk is the risk of the company not being able to meet its liabilities in time without facing massive refinancing costs or the need for premature realisation of assets. The company has substantial external funding and expects high growth in the loan portfolio. In order to reduce its liquidity risk, the company strategy is to have a good spread of financial instruments, markets and maturity terms of loans, plus preparedness facilities. Page 7 of 29

8 Business risk Business risk is the risk of unexpected loss or income failure due to changes in external conditions such as market conditions or government regulations. It consists of strategic risk, reputation risk and owner risk. Most of the company's distributors are also its owners, so the strategic risk is reduced. The risk is further reduced as the costs of the distribution system are directly linked to the size and quality of the portfolio. Agreements made with distributors who are not shareowners will moderately increase the strategic risk. Reputation risk is, in addition to the company's own reputation, to a high degree linked to Terra as a brand name. The entire Terra-Gruppen is therefore working actively to ensure that employees live up to the Terra-Gruppen's core values. External environment, working environment and equal opportunities At the turn of the year, Terra BoligKreditt AS had nine employees. The company has also entered into an agreement with the Terra-Gruppen relating to assistance in a number of areas. The company's customers are mainly serviced by the savings banks. The working environment is considered good, and there were no accidents involving employees in Absence due to illness was 27.6 days, which amounts to 1.55% of total working hours. Terra BoligKreditt AS works actively to promote full employment equality between women and men. The company has a gender equality policy aimed at preventing gender discrimination relating to pay, equal opportunities, recruitment etc. The company's activities do not pollute the external environment. Statement related to the annual accounts The annual accounts for 2008 are prepared in accordance with the 1998 Accounting Act and regulations relating to financial enterprises of 16 December The Board of Directors is of the opinion that the annual accounts including the balance sheet give a true and fair view of the financial position of the company at year-end. The annual report also gives a true and fair view of the development and results of the operations and the company's financial position. Total interest income and similar income amounted to NOK 897 million (NOK 399 million). Total interest charges and similar expenses amounted to NOK 825 million (NOK 353 million). Net interest and credit commissions amounted to NOK 72 million (NOK 46 million). There were no losses on loans or guarantees in The annual accounts show a profit for the year of NOK 6,225,510, as against a loss for the year of NOK 5,725,169 in Going concern Pursuant to Section 3-3 of the Norwegian Accounting Act, the Board of Directors confirm that the annual accounts have been compiled on the assumption that the company is a going concern. No significant events occurred after the year-end balance sheet date. Page 8 of 29

9 Balance sheet, liquidity and capital adequacy ratio. As at 31 December 2008, the company's book equity was NOK 571 million. Terra BoligKreditt AS had a capital adequacy ratio of 16.63%. As at 31 December 2008, the company had distributable equity of NOK 316,447. Allocation of profit for the year The profit for the year is NOK 6,225,510. The Board of Directors proposes that the profit be allocated as follows: Gruppen contribution rendered NOK 5,965,200 Allocated to other reserves NOK 260,310 Total NOK 6,225,510 Oslo, 12 February 2009 Board of Directors of Terra BoligKreditt AS Stein Ole Larsen Helge Roar Dalen Gunnar Dolven Chairman Bjørn Riise Espen Strøm Tom Høiberg Managing Director Page 9 of 29

10 PROFIT AND LOSS ACCOUNT Amounts in NOK 1, INTEREST RECEIVABLE AND SIMILAR INCOME Interest from loans to and receivables from customers 749, ,715 Interest from loans to and receivables from credit institutions 87,023 17,684 Interest and similar income from securities 50,968 11,168 Other interest and similar income 9,944 8,279 Total interest receivable and similar income 896, ,846 INTEREST PAYABLE AND SIMILAR EXPENSE Interest on debt to credit institutions 1, Interest on securities in issue 806, ,546 Other interest payable and similar expense 17,705 6,260 Total interest payable and similar expense 825, ,949 NET INTEREST INCOME AND CREDIT COMMISSIONS 71,845 45,898 INCOME FROM SECURITIES WITH VARIABLE RETURN COMMISSIONS AND OTHER OPERATING REVENUE Other operating revenue 40 5 Commissions and banking charges Note 20 36,613 27,840 Total commissions and other operating revenues 36,573 27,835 SALARIES AND GENERAL ADMINISTRATIVE EXPENSES Salaries, fees and other personnel expenses Note 13 10,128 8,311 Administrative expenses Note 18 7,138 5,870 Total salaries and administrative expenses 17,267 14,182 Ordinary depreciation Note 6 2,509 2,400 Other operating expenses Note 19 6,977 9,173 OPERATING RESULT 8,649-7,920 Taxes Note 15 2,423-2,194 PROFIT /LOSS FOR THE YEAR 6,226-5,725 ALLOCATIONS Allocated to other reserves Other paid in capital Group contribution rendered/received (after tax) 5,965 4,895 Total allocations 6,226 5,725 Page 10 of 29

11 BALANCE SHEET Amounts in NOK 1, ASSETS Loans to and deposits with credit institutions Note 5,21 2,104, ,319 Total cash and deposits with credit institutions 2,104, ,319 LENDING TO CUSTOMERS Amortised loan Note 4 12,099,047 9,061,783 Net lending 12,099,047 9,061,783 SECURITIES WITH FIXED RATE OF RETURN Note 7 944,000 50,019 FINANCIAL DERIVATIVES Note 2,12 1,407,633 - INTANGIBLE ASSETS Deferred tax advantage Note Other intangible assets Note 6 4,080 6,029 Total intangible assets 4,339 6,029 TANGIBLE FIXED ASSETS Operating equipment Note Total tangible fixed assets OTHER ASSETS 2 6,799 PREPAID EXPENSES AND ACCRUED INCOME Note 22 53,185 28,325 TOTAL ASSETS 16,612,406 9,819,339 Page 11 of 29

12 BALANCE SHEET Amounts in NOK 1, LIABILITIES AND EQUITY LIABILITIES Certificates and other short-term loans Notes 5,11,12 209,991 2,314,574 Bonds in issue Notes 5,11,12 15,387,846 6,904,650 Debts securities in issue 15,597,837 9,219,224 Other liabilities Note 16 9, Accrued expenses and non-earned income Note ,349 68,144 Pension liabilities Note Deferred tax Note Provisions for accrued expenses and liabilities Subordinated loan capital Notes 5,11,12 258, ,771 TOTAL LIABILITIES 16,041,717 9,408,910 CALLED-UP AND FULLY PAID SHARE CAPITAL Nominal share capital Notes 8,9 140, ,000 Share premium reserve Note 9 430, ,114 Other called-up and fully paid share capital Note Total called-up and fully paid share capital 570, ,429 RETAINED EARNINGS Other reserves Note Total earned equity TOTAL EQUITY Note 9 570, ,429 TOTAL LIABILITIES AND EQUITY 16,612,406 9,819,339 Oslo, 12 February 2009 The Board of Directors of Terra BoligKreditt AS Stein Ole Larsen Helge Roar Dalen Gunnar Dolven Chairman Bjørn Riise Espen Strøm Tom Høiberg Managing Director Page 12 of 29

13 CASH FLOW STATEMENT Amounts in NOK 1, CASH FLOWS FROM OPERATING ACTIVITIES Pre-tax earnings from ordinary operations 8,649-7,920 Ordinary depreciation 2,509 2,400 Non-cash pension costs Changes in receivables -24,862-15,138 Changes in short-term liabilities and accruals 8, Net cash flow from operating activities -5,467-20,527 CASH FLOWS FROM INVESTING ACTIVITIES Payments on purchases of fixed tangible assets ,379 Changes in repayment loans -3,037,264-3,963,404 Receipts from sale of securities - 198,314 Payments for purchases of securities -893,981 - Net cash flow from investing activities -3,931,766-3,766,470 CASH FLOWS FROM FINANCING ACTIVITIES Changes in debt securities in issue 4,970,980 3,746,856 Change in subordinated loan 138, Change in other accrued expenses 98,920 41,964 Payments of group contributions 6,799 4,266 Paid-up new share capital 160,000 - Net cash flow from financing activities 5,375,088 3,793,113 Net changes in bank deposits, cash and cash equivalents 1,437,855 6,116 Bank deposits, cash and cash equivalents as at 1 Jan. 666, ,202 Bank deposits, cash and cash equivalents as at 31 Dec 2,104, ,319 Page 13 of 29

14 Note 1 Accounting policies NOTES Basic principles The annual accounts have been compiled in accordance with the Norwegian Accounting Act of 1998 and the Norwegian regulations governing annual accounts of banks and financial institutions as established by the Ministry of Finance on 16 December Accruals Prepaid income and accrued expenses at year-end are accrued and entered as debt in the Balance Sheet. Deferred revenues at year-end are entered as income and classified as a receivable in the Balance Sheet. Commissions for distributors Distributors are paid a margin for arranging mortgages. Commissions paid to distributors are expensed on a current basis. Accrued, unpaid costs to distributors at year-end are accrued and recognised as liabilities in the Balance Sheet. Interest accruals, gains on sales, commissions and fees Loans are booked at amortised cost according to the effective interest rate method. Received and paid commissions, fees, etc are included in the calculation of the effective interest rate. The calculation of the effective interest rate is based on the expected maturity of contracts. Remaining income or costs relating to contracts redeemed during the period are charged as income /expense. Loans, non-performing/doubtful loans and advances and write-downs Loans are measured at nominal value, with the exception of doubtful or non-performing loans where objective indications exist of an accrued loss due to impairment. Loans are defined as defaulted on when payments are more than 90 days late and the delay is not due to random circumstances at the borrower. Doubtful loans are not necessarily defaulted on but the customer's financial position and the value of the collateral indicate a risk of loss. If there are objective indications of impairment, the loss is measured as the difference between the book value of the asset and the present value of future cash flows discounted by the original effective interest rate (i.e. the effective interest rate calculated at initial recognition). When estimating future cash flows, any guarantees from the distributing banks are taken into account. The value of the assets recognised in the Balance Sheet is reduced by means of an appropriation account. The loss amount is included in the profit and loss account. At year-end 2008, no loans had been written down. Investments in securities Bonds are measured at fair value. For liquid securities listed on the stock exchange or in other regulated markets, the fair value is set at the closing price on the final trading day up to and including the Balance Sheet date. The fair value of illiquid securities is measured according to recognised valuation methods. Loans Issued certificates, bonds and subordinated loans are recognised at amortised cost according to the effective interest rate method. Market-based short-term financial assets Bonds classified as financial short-term assets are measured at fair value on the Balance Sheet date. Fixed tangible assets Fixed tangible assets are valued at original cost less operating financial depreciation. If the fair value of fixed tangible assets or groups of fixed tangible assets is less than book value, and the impairment is not considered to be temporary, the asset is written down. Intangible assets Intangible assets consist of software and are measured at original cost less accumulated depreciation and any write-downs. Write-downs are otherwise done as described for tangible fixed assets. Page 14 of 29

15 Pensions Pension costs are calculated using a linear contributory profile and expected final salary. Actuarial variance and the effect of changed assumptions are amortised over the anticipated remaining contributory period if they exceed 10% of the higher of the pension obligation and the pension scheme assets (corridor). Deferred tax/deferred tax assets Taxes are expensed as and when they accrue, which means that tax is related to the pre-tax accounting result. Tax related to equity transactions is recognised directly in equity. Tax consists of tax payable (tax on the taxable profit for the year) and change in net deferred tax. Deferred tax and deferred tax assets are recognised net in the Balance Sheet. Foreign currency Receivables and debts in foreign currency are converted at the current exchange rate. Forward exchange transactions / currency swaps are converted to market value and entered in the Balance Sheet. Hedge accounting Hedge accounting is done when the company's portfolios of lending and borrowing on fixed interest rate terms give rise to the need to hedge the interest rate risk. Bond issues in foreign currency are individually hedged for interest rate and currency risks. There is therefore a link between fair value hedging of the loan in foreign currency (the hedge object) and value fluctuations of the financial derivatives (hedge instruments). Hedge accounting is performed for transactions where the intention is to achieve financial hedging of earlier or future transactions. This ensures that changes in the value of the hedged item (hedge object) and the hedge instrument is entered during the same period (current cash flow). There is a documented link between the hedge instrument and the hedge object involving the following requirements for using hedge accounting: 1) The hedge object can be identified and represents a risk in the event of a change in the market value. 2) The hedge object is identified as hedged by the establishment of the hedge instrument or by a decision to hedge. 3) It is likely that changes in value of the hedge instrument and the hedge object have a high degree of correlation, so that the financial risk is significantly reduced. The hedge is dissolved if the requirements are no longer met or if the hedge object or hedge instrument is sold. With the exception of currency derivatives, all financial derivatives that meet the criteria for hedge accounting are off-balance sheet. The market value of the derivatives is a relevant gain or loss that would have occurred if the transaction were closed. The market value is therefore calculated on the basis of middle prices, interest rates and volatility at the closing date. Page 15 of 29

16 Note 2 Derivatives The purpose of all the derivative trading in Terra Boligkreditt is to reduce the interest rate risk. Interest rate swaps where Terra Boligkreditt receives a fixed interest rate and pays a floating interest rate are entered into to convert issues of bonds / certificates from a fixed interest rate to a floating interest rate exposure. Financing at a floating interest rate would reduce the risk for the company as most lending is done at a floating interest rate. Interest rate swaps where Terra Boligkreditt receives a fixed interest rate and pays a floating interest rate are entered into to hedge the interest rate margin of lending at a fixed interest rate. Such interest rate swaps have the same term to maturity as the underlying loans at a fixed interest rate. Interest rate caps are bought to hedge the lending product with an interest rate ceiling where the floating interest rate will not exceed a certain level. Buying caps secures the interest rate margin on loans with an interest rate ceiling with an increasing interest level because the interest costs on the loans will be limited to virtually the same degree as the interest income on the lending. Option premium payment on interest rate caps is expensed linearly and distributed over the term to maturity. Amounts in NOK 1, Nominal amount Market value Nominal amount Market value Interest rate cap 238, ,700 4,673 Interest rate swap lending 627,900-39, Interest rate swap borrowing 4,708,500 93,014 3,158, Interest rate and currency swap1) 5,018,305 1,637,935 1,058, Total 10,593,405 1,691,874 4,457,905 4,334 1) Nominal amount is converted to historical exchange rate. Of which financial derivatives are entered in the Balance Sheet Amounts in NOK 1, Nominal amount Market value 2) Nominal amount Market value 2) Interest rate and currency swap 1) 5,018,305 1,407,633 1,058,805 - Total 5,018,305 1,407,633 1,058,805-1) Nominal amount is converted to historical exchange rate. 2) Market value is adjusted for change in currency. Note 3 Classification of risk The company's engagements are classified on the basis of an overall evaluation. The evaluation is based on the following main criteria: - The client's ability to meet payments (income and debt) - The client's willingness to pay (payment record/ reminders) - The loan amount - Debt to asset ratio (only within 60% of assessed value) - Location of collateral Individual savings banks control the differentiation of prices within intervals provided by Terra Boligkreditt AS. Price differentiation is done mainly on the basis of collateral, the customer's financial standing and the competitive situation. All lending is provided to the housing market and all loans are therefore within the same risk class. Page 16 of 29

17 Note 4 Lending to customers Amounts in NOK 1, Repayment loans - retail market 11,866,595 8,898,070 Repayment loans - housing cooperatives 232, ,713 Total lending before specific and general provisions for losses 12,099,047 9,061,783 Specific provisions for losses - - General provisions for losses - - Total net lending to and receivables from customers 12,099,047 9,061,783 Guarantees furnished by the banks that distribute the loans ensure a reduced risk for Terra Boligkreditt AS. Terra BoligKreditt has no non-performing loans as at 31 December Lending broken down by geographical areas Loans LoansLoans as a % Amounts in NOK 1, NO01 Østfold county 537, ,893 4,44 % NO02 Akershus county 2,195,401 1,624,517 18,15 % NO03 Oslo 1,291,402 1,106,269 10,67 % NO04 Hedmark county 330, ,756 2,73 % NO05 Oppland county 77,226 75,284 0,64 % NO06 Buskerud county 659, ,291 5,45 % NO07 Vestfold county 350, ,138 2,90 % NO08 Telemark county 623, ,198 5,15 % NO09 Aust-Agder county 262, ,943 2,17 % NO10 Vest-Agder county 421, ,715 3,48 % NO11 Rogaland county 1,568,293 1,420,409 12,96 % NO12 Hordaland county 822, ,385 6,80 % NO14 Sogn og Fjordane county 59,461 60,904 0,49 % NO15 Møre og Romsdal county 211, ,657 1,75 % NO16 Sør-Trøndelag county 1,502,997 1,262,864 12,42 % NO17 Nord-Trøndelag county 214, ,613 1,78 % NO18 Nordland county 804, ,231 6,65 % NO19 Troms county 152, ,572 1,26 % NO20 Finnmark county 10,613 8,578 0,09 % NO21 Svalbard 3, ,03 % AUS Australia - 2,239 0,00 % Other - 2,677 0,00 % Total 12,099,047 9,061, ,0 % Page 17 of 29

18 Note 5 Financial risk Liquidity risk Amounts in NOK 1, No fixed maturity period Term of maturity 0-1 month Term of maturity 1-3 months Term of maturity 3-12 months Term of maturity 1-5 years Term of maturity 5 years Loans to credit institutions 2,104,174-2,104, Securities 944,000-33, , , ,753 - Financial derivatives 1,407,633 1,407,633 Loans to customers 1) 12,099,047-12,099, Other assets with remaining term to maturity 53,187-39,246 12, ,206 - Assets with no fixed maturity period 4,365 4, Total assets 16,612,406 4,365 14,276, , ,228 1,951,592 - Debt securities in issue 15,597, ,991 2,393,060 12,994,786 - Subordinated loan capital 258, ,159 Other debt with remaining term to maturity 176, ,606 21,553 29, Debt without fixed term to maturity 8,941 8, Equity 570, , Total liabilities and equity 16,612, , , ,544 2,422,626 12,994, ,159 1) Classification is based on notice period. Interest rate risk Amounts in NOK 1, No interest rate exposure Fixed interest rate 0-1 month Fixed interest rate 1-3 months Fixed interest rate 3-12 months Fixed interest rate 1-5 years Fixed interest rate over 5 years Loans to credit institutions 2,104,174-2,104, Securities 944,000-91, , ,712 40,178 - Financial derivatives 1,407,633 1,407,633 Loans to customers 12,099,047-11,385,254 3,477 13, , ,266 Non-interest bearing assets 57,552 57, Total assets 16,612,406 57,552 13,580, , ,150 2,010, ,266 Derivatives , , , ,200 Debt scurities in issue 15,597,837-3,015,188 3,450, ,127 8,874,123 - Subordinated loan capital 258, , Pension liabilities Non-interest bearing debt 185, , Equity 570, , Total liabilities and equity 16,612, ,410 3,015,188 3,708, ,127 8,874,123 - Derivatives - - 4,268,305 3,458, ,500-7,468,305 - Net interest rate exposure 0-698,858 6,342,072-5,914, ,523 85,906 25,066 Interest rate risk A one per centage point increase in all interest rate levels would reduce the value of the company's assets by NOK 41.4 million, whereas the value of the liabilities would decrease by NOK 56.9 million. The net effect on equity would consequently be an increase of NOK 15.5 million. A reduction of the general interest rate level would on the other hand increase the value of the company's assets by NOK 42.9 million, increase the value of debt by NOK 58.5 million and reduce equity by NOK 15.5 million. Currency risk Amounts in NOK 1, No currency exposure Maturity date 0-1 month Maturity date 1-3 months Maturity date 3-12 months Maturity date 1-5 years Maturity date over 5 years Debt securities in issue in CHF 1,493, ,493,438 - Debt securities in issue in EUR 4,932, ,932,500 - Currency hedge/interest rate hedge in CHF ,493,438 - Currency hedge/interest rate hedge in EUR ,932,500 - Total 6,425, Net currency exposure Page 18 of 29

19 Note 6 Fixed tangible assets Amounts in NOK 1,000 Computer equipment Software / intangible asset Total Original cost 1 Jan ,158 12,560 Additions Disposals Original cost 31 Dec ,679 12,735 Accumulated depreciation 1 Jan ,129 6,466 Accumulated depreciation 31 Dec ,598 8,629 Book value ,080 4,106 Depreciation charge for the year 40 2,469 2,509 Useful economic lifetime 3-5 yrs 5 yrs Depreciation schedule Linear Linear Off-balance sheet annual rent on fixed tangible assets and rent on premises 1,299 Note 7 Certificates, bonds and other securities with fixed yield Amounts in NOK 1,000 Bonds broken down by issuer sector Nominal value Cost price Market value Commercial banks 115, , ,845 Credit institutions 28,000 27,887 27,780 Savings banks 807, , ,376 Total market-based bonds 950, , ,000 Total securities with fixed yield 950, , ,000 Change in value for the year charged to the profit and loss account 417 Average effective interest rate is 5.45%. The calculation is based on a weighted market value Average term to maturity 1,1 Average duration 0,2 Page 19 of 29

20 Note 8 Share capital and shareholder information The share capital consists of 140,000,000 shares each with a nominal value of NOK 1. List of shareholders as at 31 Dec. 08 Number Ownership interest Voting share Terra Group AS 140,000, % 100 % Total 140,000,000 0 % 100 % The shares have full voting rights pursuant to the company's Articles of Association. Note 9 Equity Amounts in NOK 1,000 Share capital Share premium reserve Other called-up and fully paid share capital Other reserves Total equity Equity as at 1 Jan , , ,429 Capital increase 40, , ,000 Profit for the year ,226 6,226 Paid group contribution (after tax) ,965-5,965 Equity as at 31 Dec , , ,689 Note 10 Capital adequacy ratio Amounts in NOK 1,000 Equity and subordinated capital Share capital 140, ,000 Share premium reserve 430, ,114 Other called-up and fully paid capital Other reserves Total equity recognised in the Balance Sheet 570, ,429 Intangible assets -4,080-6,029 Subordinated loan capital 258, ,771 Total equity and subordinated capital 824, ,171 Capital adequacy ratio Weighted calculation basis 4,960,025 4,159,908 Equity and subordinated capital 824, ,171 Capital adequacy ratio 16,63 % 12,60 % Required capital corresponding to 8% of calculation basis 396, ,793 Surplus equity and subordinated capital 427, ,378 Page 20 of 29

21 Note 11 Debts Terra BoligKreditt has overdraft facilities with DnBNOR Bank ASA. The overdraft facility, which amounts to NOK 50 million had not been used as at 31 December 2008.The company also has contingency facilities with DnBNOR Bank ASA limited of NOK 1 billion. The duration of the committed credit line has a rolling one year lifespan. When issued, these secrities will have a one-year term to maturity. The credit facility was unused as at Conditions apply concerning equity both for the overdraft and contingency facilities with DnBNOR Bank ASA. The contingency facility with DnBNOR Bank ASA also includes conditions concerning the company's rating and the guarantee structure with the distributor banks. Conditions apply also with regard to overcollateralisation. For covered bonds ascribed to the company's cover pool, requirements for overcollateralisation of 105% apply to loans that are included in the Euro Medium Term Note Programme (EMTN). This means that the company must at any time have values in its cover pool that exceed at least 105 % of total outstanding covered bonds. For loans not ascribed to the cover pool, requirements are that the book vale of the loans and other liabilities shall not exceed 95% of the book value of free, non-mortgaged assets. Book value of free, non-mortgaged assets must as a minimum equal NOK 500 million. In addition to the above covenants, a number of ordinary covenants are related to loans that are not ascribed to the cover pool. As at 31 Dec. 2008, the company has bonds and certificates in issue corresponding to a total value of NOK 15,860,938,000. Amount in 1,000 NOK Nominal value of certificates 210,000 2,315,000 Difference in market value Nominal value of bonds 15,391,938 6,907,805 Difference in market value -4,092-3,155 Nominal value of subordinated loan capital 259, ,000 Difference in market value Total 15,855,996 9,338,995 Page 21 of 29

22 Covered bonds - Amounts in 1,000 NOK ISIN Nominal amounts Currency Interest rate terms Established Term to maturity NO ,500,000 NOK Floating 3M Nibor % ,000 1,500,000 NO ,500,000 NOK Fixed 5,50 % ,200,000 1,500,000 CH ,000 CHF Fixed 3,14 % ,493,438 1,058,805 NO ,000 NOK Floating 3M Nibor % , ,000 NO ,000,000 NOK Fixed 5,75 % ,000,000 - NO ,000 NOK Fixed 5,40 % ,000 - NO ,000 NOK Floating 3M Nibor % ,000 - XS ,000 EUR Fixed 4,63 % ,932,500 - NO ,000,000 NOK Floating 3M Nibor % ,500 - NO ,000,000 NOK Floating 3M Nibor % ,415,000 - Value adjustments -4,082-2,443 Total covered bonds 1) 13,945,356 4,656,362 1) For covered bonds (CB) ascribed to the company's cover pool, requirements for 105% overcollateralisation apply. This means that the company must at all times have values in its cover pool amounting to at least 105% of total outstanding CB. Other bond debts - Amounts in 1,000 NOK Nominal ISIN amounts Currency Interest rate terms Established Term to maturity NO ,000 NOK Floating 3M Nibor % , ,000 NO ,000 NOK Fixed 4,17 % ,000 NO ,000 NOK Floating 3M Nibor % , ,000 NO ,000 NOK Fixed 4,68 % , ,000 NO ,000 NOK Fixed 5,42 % , ,000 Value adjustments Total other bond debt 1) 1,442,490 2,248,288 1) As at 31 Dec. 08 loans not ascribed to the cover pool must be % overcollateralised. Certificate borrowing - Amounts in 1,000 NOK ISIN Nominal amounts Currency Interest rate terms Established Term to maturity NO ,000 NOK Fixed 4,66 % ,000 NO ,000 NOK Fixed 4,84 % ,000 NO ,000 NOK Floating 3M Nibor % ,000 NO ,000 NOK Fixed 4,89 % ,000 NO ,000 NOK Floating 3M Nibor ,000 NO ,000 NOK Fixed 5,14 % ,000 NO ,000 NOK Fixed 5,15 % ,000 NO ,000 NOK Fixed 5,75 % ,000 NO ,000 NOK Fixed 6,33 % ,000 NO ,000,0 NOK Fixed 6,27 % ,000 - Certificate loans redeemed in Value adjustments Total certificate borrowing 1) 209,991 2,314,574 1) As at 31 Dec. 08 loans not ascribed to the cover pool must be % overcollateralised. Page 22 of 29

23 Subordinated loan capital - Amounts in 1,000 NOK ISIN Nominal amounts Currency Interest rate terms Establishment Term to maturity Balance Balance NO ,000 NOK Floating 3M Nibor % 1) ) 120, ,000,0 NO ,000 NOK Floating 3M Nibor % 2) ) 139,000 - Value adjustments Total subordinated loan capital 258, ,771 1) Subordinated loan of NOK 120 million with maturity date 30 June 2016, have redemption rights (call) 30 June If the redemption right is unused, interest terms are 3M Nibor %. 2) Subordinated loan of NOK 139 million with maturity date 6 March 2018, have redemption rights (call) 6 March If the redemption right is unused, interest terms are 3M Nibor %. Note 12 Cover pool Cover pool as at 31 Dec Amounts in 1,000 NOK Market Value 1) Mortgages 11,512,629 Security mass and derivatives 3,774,644 Total 15,287,273 The cover pool's overcapitalization 108,00 % 1) Value adjusted only for changes in interest rates and exchange rates where credit spread is excluded. Page 23 of 29

24 Note 13 Salaries and fees Amounts in 1,000 NOK Wage costs Wages 8,137 6,495 National insurance contributions Pension costs Other personnel costs Total wage costs 10,128 8,311 Average number of employees (number of full time equivalents) 9,4 7,4 Remunerations to senior employees Wages etc. Pension costs Managing Director Tom Høiberg kr 1,825,869 kr 84,079 Deputy Managing Director Kjartan Magnar Bremnes kr 1,293,946 kr 82,464 Board of directors Fees Loans Helge Roar Dalen kr 100,000 kr 800,172 Gunnar Dolven kr 100,000 Espen Strøm kr 94,334 Jørn Eldby kr 94,334 Niels Tørslev kr 9,065 Steinar Moslet kr 5,666 Lars Otterlei kr 5,666 Total directors' fees kr 409,065 Audit committee Oddvar Lillehol kr 10,000 Jørn Kristensen kr 10,000 Thomas Luraas kr 7,500 Total audit committee kr 27,500 Supervisory board Sven Arne Trolsrud kr 7,500 Ragnar Hallan kr 7,500 Svein Solberg kr 7,500 Tore Karlsen kr 7,500 Odd Inge Løfald kr 5,000 Egon Moen kr 5,000 Øivind Larsen kr 2,500 Total supervisory board kr 42,500 Auditors Remuneration to Deloitte AS and associated companies is distributed as follows less VAT: Statutory auditing 162, ,293 Other certification services 206, ,050 Page 24 of 29

25 Note 14 Pension costs Contribution scheme The company's pension plan was changed with effect from 1 January This means that the defined benefit plan was closed for all new employees from that date. A contribution scheme was arranged for these employees. Those employed before 1 January 2005 may voluntarily change to a contribution scheme, which is based on the company contributing 5% of wages from 2-6 G, and 8% of wages from 6-12 G. In 2008, NOK 161,734 were expensed in relation to the contribution scheme, including nat. ins. contributions. Corresponding figures for 2007 are NOK 149, 996. An additional NOK 89,265 including nat. ins. contributions have been expensed in relation to risk insurance, which comprises disability and a child pension for those who are included in the contribution scheme. Corresponding figures for 2007 are NOK 70,637. Defined benefit plan Two employees who were employed before 1 January 2005 have declined to voluntarily change to the contribution plan. These are included in a defined benefit scheme, which entitles them to defined future benefits. These mainly depend on the number of years in service, wage level when reaching retirement age, plus the amount of benefits from the National Insurance Scheme. The obligations aavre covered through insurance companies. Amunts in 1,000 NOK Present value of the year's accrued pension entitlements Interest charges on the pension obligation Return on pension scheme assets Amortization, actuarial variance and effect on result of change of pension scheme -9 - Net pension costs Administration expenses Pension costs collective scheme Employer's national insurance contribution Total pension costs Liability Liability Accrued pension liabilities Calculated effect of future future ware adjustments Calculated pension liabilities 1, Pension scheme assets at market value 1, Non-recognised effect of actuarial variance Employer's national insurance contributions Net pension liability Financial assumptions: Discount rate 5,80 % 5,00 % Anticipated wage adjustment 4,00 % 4,25 % Anticipated adjustment of G 3,75 % 4,25 % Anticipated pension adjustment 3,75 % 4,25 % Anticipated return on pension scheme assets 5,80 % 5,80 % Voluntary retirement 2,00 % 2,00 % Actuarial assumptions relating to demographic factors and retirement are based on ordinary assumptions applied by the insurance business. Page 25 of 29

26 Note 15 Taxes Amounts in 1,000 NOK Tax for the year is calculated as follows: Income tax payable Pre-tax profit 8,649-7,920 Permanent differences: Group contribution -8,285 6,799 Other permanent differences 6 82 Change in temporary differences: Business assets 1, Pensions Securities Total changes in temporary differences 1,567 1,039 Tax base for the year 1,937 - Tax payable for remuneration Income tax payable Specification of temporary differences as at 31 Dec. Fixed assets ,275 Pensions Securities Total temporary differences Deferred tax/deferred tax assets recognized in Balance Sheet Deferred tax/deferred tax assets recognized in Balance Sheet Tax for the year: Income tax payable for the year Change in deferred tax Tax on profit from paid/received group contribution 2,320-1,904 Total tax 2,413-2,194 Reconciliation of expected and actual tax: Pre-tax profit 8,649-7,920 Expected tax on income at nominal tax rate (28%) 2,423-2,217 Tax effect on following items: Non-deductible costs 2 23 Tax 2,423-2,194 Effective tax rate 28,0 % 27,7 % Page 26 of 29