Net interest income Profit before tax Profit for the period

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2 About KBN Established by an act of Parliament in 1926 as a state administrative body called Norges Kommunalbank, Kommunalbanken AS (KBN) gained its current status and structure through a conversion act dated 1 November KBN s primary objectives are to provide stable access to low cost funding to Norwegian municipalities, counties, intermunicipal companies and other companies with a municipal guarantee that carry out tasks at a municipal level. KBN s financial objectives are to secure a satisfactory return to its owners and to strengthen its capital base so that it can maintain its lending activity. Financial highlights RESULTS Net interest income Profit before tax Profit for the period Return on equity after tax* 29,31% 20,46% 21,62 % Return on assets after tax* 0,37% 0,30% 0,26 % LENDING New disbursments Outstanding loans** LIQUIDITY PORTFOLIO** BORROWINGS New long-term borrowings Repurchase of own debt Redemptions Total borrowings** TOTAL ASSETS EQUITY Equity Core capital adequacy ratio 10,00% 8,37% 9,15 % Total capital adequacy ratio 13,85% 9,86% 9,86 % * Return on equity and return on assets are annualized ** Principal amounts 2

3 Results KBN's profit after tax in the second quarter of was NOK 273 million, compared with NOK 194 million for the same period last year. Profit after tax in the first half of was NOK 591 million, compared to NOK 364 million in the same period in Significant MTM changes on issued debt and financial derivatives contributed to the increase in the first half of. The result after tax adjusted for unrealised gains is NOK 474 million. Net interest income in the second quarter of was NOK 335 million, an increase of NOK 63 million compared with the same period in Net interest income in the first half of was NOK 674 million, compared with NOK 519 million in the same period in per cent of the total net interest income in the first half of comes from lending operations, and 58 per cent from the management of surplus liquidity. The increase in net interest income was primarily driven by the portfolio growth KBN experienced in the first half of, and slightly better margins on liquidity and lending. The first half of was characterised by great uncertainty as to economic development in several countries in the euro zone. The turmoil did not affect KBN s underlying operations in any significant degree, but gave large fluctuations in the MTM values of issued debt and financial derivatives. Net unrealised gains on financial instruments amounted to NOK 163 million in the first half of, compared with NOK 0.2 million in the same period last year. Return on equity in the first half of was 29.3 per cent, an increase from 20.5 per cent in the same period last year. Return on equity adjusted for MTM changes was 23.5 per cent in the first half of. Lending In the first half of, KBN s total lending portfolio increased by NOK 8.2 billion (4.5 per cent) to NOK billion. In comparison, the lending portfolio grew by NOK 18 billion (11.7 per cent) in the first half of The lending portfolio decreased by NOK 0.1 billion in the second quarter. The decrease is due to lower loan demand from customers and the increased competition in the market for short term municipal loans. Short term municipal loans are used in KBN s day to day liquidity operations. In the second quarter KBN disbursed NOK 7.7 billion in new loans, compared with NOK 10.1 billion in the same period in Total new disbursements in the first half of amounted to NOK 19.0 billion, a decrease from NOK 22.0 billion in the same period in As of 30 June, KBN s market share was 48.3 per cent. Financing local infrastructure projects has been an important area for KBN. As of 30 June amounted total loan commitments to infrastructure projects to NOK 21.8 billion, of which NOK 12.2 billion was paid out. In the second quarter KBN approved a loan application for long-term financing of E18 Vestfold AS and Hardangerbrua AS. Liquidity management KBN has a policy of maintaining net cash balances equivalent to a minimum of 12 months net debt redemptions so that in a given situation KBN can cover all its debt obligations for the next 12 months without additional borrowing. KBN s liquidity portfolio increased by NOK 14.2 billion in the first half of and currently stands at NOK billion in total. The liquidity portfolio is managed using a low risk investment policy and is carefully placed in notes issued by governments, states, regions, supranationals and financial institutions with a high credit rating. Funding KBN has had good access to financing at competitive rates. During the first half of KBN has issued bonds for a total of NOK 96.6 billion in 12 different currencies, compared with NOK 81.4 billion in the same period last year. Demand for KBN's bonds in public markets was good and the bank has issued two benchmark transactions for respectively USD 2 billion and USD 1 billion, and more bonds in AUD and GBP in the first half of. Japan has been an important funding market for KBN over the years, and 46 percent of new funding in the first half of came from Uridashi market. In 2010, KBN established a EUR 2 billion Certificate Programme (ECP) which is used to manage short-dated liquidity. In the first half of there were issued certificates for NOK 4.3 billion, of which NOK 0.2 billion is still outstanding at 30 June. 3

4 Capital As of 30 June KBN s total eligible capital amounted to NOK 6.6 billion, with core capital at NOK 4.8 billion. In the second quarter of the capital base was strengthened with a new subordinated loan of CAD 275 million. In the first half of KBN s total assets increased by NOK 13.3 billion to NOK 321 billion. As of 30 June, KBN s core capital ratio was per cent, compared with 8.37 per cent in the same period last year. The total capital ratio was per cent, compared with 9.86 per cent in the first half of Future prospects KBN is the largest provider of financing to the municipal sector with a market share of 48.3 percent. KBN expects continued strong demand for long-term loans in the second half of, and will contribute to fund local welfare, transport, infrastructure and environment. KBN has a solid presence in the funding markets with good access to both long- and short-term funding. Part of future loan demand was pre-financed in the first half of through several large bond issues. KBN expects continued high borrowing activity throughout the year. The economic developments in the EU and the U.S. are still uncertain. The accumulation of public debt in several countries could threaten the financial stability and affect the liquidity and prices in the capital markets. KBN will maintain its role by being a stable and provider of long-term financing for the municipal sector. The regulatory framework for financial institutions will be changed through the Basel III regulations, which are expected to be adopted in late and implemented in the EU / EEA between 2013 and If the capital requirements for financial institutions with low risk are increased in the new framework, it could affect future growth and KBN's ability to provide new loans to the municipal sector. Statement from the Board of Directors We confirm that the half year report for the period 1 January to 30 June is, to the best of our knowledge, prepared in line with IAS 34 Interim Financial Reporting and that the information in the accounts provides a fair overview of the company's assets, liabilities, its financial position and results. To the best of our knowledge, the interim report provides a fair overview of important events during the accounting period and their effects on the half year accounts and also the material risk and uncertainties facing the company during the next accounting period. Oslo, 25 August The Board of Directors, Kommunalbanken AS 4

5 INCOME STATEMENT Note April-June April June Interest income Interest expenses Net interest income Commission expenses and expenses of banking services Net unrealised gain/(loss) on financial instruments at fair value (89) Net realised gain/(loss) on financial instruments Total other operating income (66) Salaries and administrative expenses Depreciation on fixed assets Other expenses Total operating expenses Profit before tax Income tax Profit for the period STATEMENT OF COMPREHENSIVE INCOME Note April-June April June Profit for the period Other comprehensive income Total comprehensive income for the period

6 STATEMENT OF FINANCIAL POSITION Note 30 June 30 June December 2010 ASSETS Deposits with credit institutions Instalment loans 3, Notes, bonds and other interest-bearing securities 3, Financial derivatives Other assets TOTAL ASSETS LIABILITIES AND EQUITY Loans from credit institutions Commercial paper Senior securities issued 3, Financial derivatives Other liabilities Current tax liabilities Deferred tax liabilities Pension liabilities Subordinated debt Hybrid Tier 1 capital instruments TOTAL LIABILITIES Share capital Retained earnings Total comprehensive income for the period TOTAL EQUITY 7, TOTAL LIABILITIES AND EQUITY

7 STATEMENT OF CHANGES IN EQUITY 1 January 30 June Share capital Retained earnings Total equity Equity as of 1 January Total comprehensive income for the period Dividends 0 (165) (165) Equity as of 30 June January 30 June 2010 Share capital Retained earnings Total equity Equity as of 1 January Total comprehensive income for the period Dividends Equity as of 30 June January 31 December 2010 Share capital Retained earnings Total equity Equity as of 1 January Total comprehensive income for the period Dividends 0 (267) (267) Equity as of 31 December

8 Cash flows from operating activities STATEMENT OF CASH FLOWS Interest received Interest paid (2 324) (1 651) (3 846) Fees and commissions paid (9) (9) (18) Receipts from repurchase of issued securities Cash payments to employees and suppliers (41) (40) (92) Income taxes paid (290) (154) (400) Net disbursement of loans to customers (8 278) (17 320) (32 566) Net (increase)/decrease in deposits with credit institutions (6 049) Net (increase)/decrease in notes, bonds and other interest-bearing securities (15 874) (30 516) (17 760) Net (increase)/decrease in other assets 0 (1) (2) Net increase/(decrease) in other liabilities (13) (8) 14 Net cash flows from operating activities (18 995) (46 674) (55 825) Cash flows from investing activities Purchase of property and equipment (2) (3) (7) Net cash flows from investing activities (2) (3) (7) Cash flows from financing activities Net proceeds from issuance of commercial paper Net proceeds from issuance of debt securities Net proceeds from other borrowed funds (487) 0 0 Net proceeds from issuance of subordinated debt Dividends paid 0 0 (267) Net cash flows from financing activities Net change in cash and cash equivalents (16 290) (10 059) Effects of foreign exchange differences (12 771) Cash and cash equivalents at 1 January Net change in cash and cash equivalents (210) (155) 15 Cash and cash equivalents at end of period (132) (92) 78 Deposits with credit institutions without agreed period of notice (132) (92) 78 8

9 ACCOUNTING POLICIES KBN prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as adopted by EU. Interim financial statements for the first half of are prepared in accordance with IAS 34 Interim Financial Reporting, and follow the same accounting policies as annual financial statements for Preparation of the financial statements in accordance with IFRS requires the management to make use of estimates and make assumptions which can affect carrying values of assets and liabilities, and revenues and costs. Estimates and assumptions are based on historical experience and expectations of future trends, and actual results may deviate from the estimates. The fair value of financial instruments that are not traded in an active market, or do not have available quoted prices at Balance Sheet date, is determined using valuation techniques. The valuation requires the management to make assumptions and use estimates when considering credit risk and liquidity risk. Even if the assumptions and estimates are based to the greatest possible extent on actual market conditions prevailing at Balance Sheet date, actual results may differ from accounting estimates. NOTE 1 Net interest income April-June April-June Interest income from deposits with credit institutions Interest income from instalment loans Interest income from notes, bonds and other interest -bearing securities Interest income from financial derivatives (527) (1 213) (632) (1 296) (2 385) Total interest income Interest expenses on loans from credit institutions Interest expenses on senior securities issued Interest expenses on subordinated debt Interest expenses on financial derivatives (1 306) (2 601) (1 578) (3 313) (5 589) Total interest expenses Net interest income NOTE 2 Unrealised gain/(loss) on financial instruments at fair value Unrealised gain/(loss) on financial instruments at fair value April-June April-June Instalment loans 190 (355) (186) Notes, bonds and other interest-bearing securities 78 (646) Financial derivatives (1 899) (1 713) (1 468) Loans from credit institutions (1) (1) Senior securities issued (336) Subordinated debt and Hybrid Tier 1 capital instruments (14) (10) Net unrealised gain/(loss) on financial instruments at fair value (89) 9

10 NOTE 3 Classification of financial instruments At 30 June Total At fair value through profit or loss Held to FVO Held for trading Fair value hedge maturity Loans and receivables Other liabilities Deposits with credit institutions Instalment loans Notes, bonds and other interest-bearing securities Financial derivatives Total financial assets Loans from credit institutions Commercial paper Senior securities issued Financial derivatives Subordinated debt Hybrid Tier 1 capital instruments Total financial liabilities At 30 June 2010 Total At fair value through profit or loss Held to FVO Held for trading Fair value hedge maturity Loans and receivables Other liabilities Deposits with credit institutions Instalment loans Notes, bonds and other interest-bearing securities Financial derivatives Total financial assets Loans from credit institutions Commercial paper Senior securities issued Financial derivatives Subordinated debt Hybrid Tier 1 capital instruments Total financial liabilities At 31 December 2010 Total At fair value through profit or loss Held to FVO Held for trading Fair value hedge maturity Loans and receivables Other liabilities Deposits with credit institutions Instalment loans Notes, bonds and other interest-bearing securities Financial derivatives Total financial assets Loans from credit institutions Commercial paper Senior securities issued Financial derivatives Subordinated debt Hybrid Tier 1 capital instruments Total financial liabilities

11 NOTE 4 Instalment loans 30 June 30 June December 2010 Outstanding loans (principal amount) Accrued interest Adjustment for fair value Total instalment loans NOTE 5 Senior securities issued 30 June 30 June December 2010 Senior securities issued (nominal amounts) at 1 January New issuance Redemptions (66 230) (51 706) (91 872) Amortisation (215) (279) (374) Translation differences (20 257) Senior securities issued (nominal amounts) at end of period Accrued interest Adjustment for fair value (5 178) (4 490) (4 884) Total senior securities issued NOTE 6 Notes and bonds Exposure as at 30 June Maturity < 1 year > 1 year Total Risk class A-2 A-1/ A-1+ Not rated A- A/A+ AA AAA Not rated Sovereigns and central banks Multilateral development banks Regional authorities Financial institutions Securitisation Covered bond Total Exposure as at 30 June 2010 Maturity < 1 year > 1 year Total Risk class A-2 A-1/ A-1+ Not rated A- A/A+ AA AAA Not rated Sovereigns and central banks Multilateral development banks Regional authorities Financial institutions Securitisation Covered bond Total

12 NOTE 7 Equity and subordinated loan capital Supplementary capital cannot exceed 100 per cent of Tier 1 capital. KBN s capital satisfies the capital adequacy requirements. 30 June 30 June 2010 Core capital Share capital Retained earnings Total equity Hybrid Tier 1 capital instruments Pre-tax profit for the period (reduced by 50 %) Deferred tax asset 0 0 Goodwill (1) (1) Allocated to dividend 0 (267) Unrealised gains on issued debt attributed to changes in credit risk (172) (227) Total Tier 1 capital Supplementary capital Subordinated debt Perpetual subordinated debt Total supplementary capital Total capital Subordinated capital has been calculated pursuant to The Regulation governing calculation of subordinated capital for financial institutions. NOTE 8 Capital adequacy Credit risk Book value 30 June Risk-weighted assets Minimum capital requirements Sovereigns and central banks Regional goverments and local authorities Of which are Norwegian municipalities Public sector entities Multilateral development banks Financial institutions Of which counterparty exposure on derivatives Corporates Claims secured by residential property Covered bonds Other assets Total credit risk Market risk Operational risk (Basic Indicator Approach) Minimum capital requirements Capital adequacy ratio 13.85% Core capital adequacy ratio 10.00% 12