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 1999. 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 2010 2010 Net interest income 674 519 1 197 Profit before tax 821 506 1 034 Profit for the period 591 364 741 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 18 982 22 018 49 933 Outstanding loans** 192 059 168 580 183 841 LIQUIDITY PORTFOLIO** 100 480 100 085 86 278 BORROWINGS New long-term borrowings 96 642 81 369 138 231 Repurchase of own debt 1 003 1 510 2 032 Redemptions 65 227 50 196 89 840 Total borrowings** 300 171 283 367 290 231 TOTAL ASSETS 321 057 299 770 307 666 EQUITY Equity 4 461 3 925 4 034 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
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 2010. 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 2010. Net interest income in the first half of was NOK 674 million, compared with NOK 519 million in the same period in 2010. 42 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 192.1 billion. In comparison, the lending portfolio grew by NOK 18 billion (11.7 per cent) in the first half of 2010. 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 2010. 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 2010. 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 100.5 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
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 10.00 per cent, compared with 8.37 per cent in the same period last year. The total capital ratio was 13.85 per cent, compared with 9.86 per cent in the first half of 2010. 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 2019. 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
INCOME STATEMENT Note April-June April June 2010 2010 2010 Interest income 1 580 3 057 1 184 2 174 5 034 Interest expenses 1 245 2 383 912 1 655 3 837 Net interest income 1 335 674 272 519 1 197 Commission expenses and expenses of banking services 5 9 5 9 18 Net unrealised gain/(loss) on financial instruments at fair value 2 28 163 12 0 (89) Net realised gain/(loss) on financial instruments 41 37 13 38 41 Total other operating income 64 191 20 29 (66) Salaries and administrative expenses 17 35 17 32 75 Depreciation on fixed assets 1 2 2 3 5 Other expenses 3 7 4 8 17 Total operating expenses 20 44 22 43 97 Profit before tax 379 821 270 506 1 034 Income tax 106 230 76 142 293 Profit for the period 273 591 194 364 741 STATEMENT OF COMPREHENSIVE INCOME Note April-June April June 2010 2010 2010 Profit for the period 273 591 194 364 741 Other comprehensive income 0 0 0 0 0 Total comprehensive income for the period 273 591 194 364 741 5
STATEMENT OF FINANCIAL POSITION Note 30 June 30 June 2010 31 December 2010 ASSETS Deposits with credit institutions 3 2 240 10 6 857 Instalment loans 3,4 193 701 170 867 185 679 Notes, bonds and other interest-bearing securities 3,6 102 158 104 111 88 958 Financial derivatives 3 22 941 24 767 26 155 Other assets 16 15 17 TOTAL ASSETS 321 057 299 770 307 666 LIABILITIES AND EQUITY Loans from credit institutions 3 650 1 101 989 Commercial paper 3 155 1 101 0 Senior securities issued 3,5 297 479 281 860 288 093 Financial derivatives 3 15 215 10 255 13 067 Other liabilities 189 15 37 Current tax liabilities 199 476 259 Deferred tax liabilities 182 60 182 Pension liabilities 25 24 25 Subordinated debt 3 1 835 675 306 Hybrid Tier 1 capital instruments 3 666 277 672 TOTAL LIABILITIES 316 596 295 845 303 632 Share capital 1 221 1 221 1 221 Retained earnings 2 649 2 340 2 814 Total comprehensive income for the period 591 364 TOTAL EQUITY 7,8 4 461 3 925 4 034 TOTAL LIABILITIES AND EQUITY 321 057 299 770 307 666 6
STATEMENT OF CHANGES IN EQUITY 1 January 30 June Share capital Retained earnings Total equity Equity as of 1 January 1 221 2 814 4 034 Total comprehensive income for the period 0 591 591 Dividends 0 (165) (165) Equity as of 30 June 1 221 3 240 4 461 1 January 30 June 2010 Share capital Retained earnings Total equity Equity as of 1 January 2010 1 221 2 340 3 561 Total comprehensive income for the period 0 364 364 Dividends 0 0 0 Equity as of 30 June 2010 1 221 2 704 3 925 1 January 31 December 2010 Share capital Retained earnings Total equity Equity as of 1 January 2010 1 221 2 340 3 561 Total comprehensive income for the period 0 741 741 Dividends 0 (267) (267) Equity as of 31 December 2010 1 221 2 814 4 034 7
Cash flows from operating activities STATEMENT OF CASH FLOWS 2010 2010 Interest received 3 026 2 141 4 853 Interest paid (2 324) (1 651) (3 846) Fees and commissions paid (9) (9) (18) Receipts from repurchase of issued securities 37 38 41 Cash payments to employees and suppliers (41) (40) (92) Income taxes paid (290) (154) (400) 400 326 537 Net disbursement of loans to customers (8 278) (17 320) (32 566) Net (increase)/decrease in deposits with credit institutions 4 770 845 (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 189 1 095 71 Net proceeds from issuance of debt securities 30 285 29 293 45 920 Net proceeds from other borrowed funds (487) 0 0 Net proceeds from issuance of subordinated debt 1 571 0 49 Dividends paid 0 0 (267) Net cash flows from financing activities 31 558 30 387 45 773 Net change in cash and cash equivalents 12 561 (16 290) (10 059) Effects of foreign exchange differences (12 771) 16 135 10 075 Cash and cash equivalents at 1 January 78 63 63 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
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 2010. 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 2010 2010 2010 Interest income from deposits with credit institutions 10 15 8 14 28 Interest income from instalment loans 1 474 2 890 1 166 2 216 4 910 Interest income from notes, bonds and other interest -bearing securities 622 1 365 642 1 240 2 481 Interest income from financial derivatives (527) (1 213) (632) (1 296) (2 385) Total interest income 1 580 3 057 1 184 2 174 5 034 Interest expenses on loans from credit institutions 3 6 2 6 13 Interest expenses on senior securities issued 2 547 4 960 2 483 4 954 9 395 Interest expenses on subordinated debt 1 18 5 9 19 Interest expenses on financial derivatives (1 306) (2 601) (1 578) (3 313) (5 589) Total interest expenses 1 245 2 383 912 1 655 3 837 Net interest income 335 674 272 519 1 197 NOTE 2 Unrealised gain/(loss) on financial instruments at fair value Unrealised gain/(loss) on financial instruments at fair value April-June April-June 2010 2010 Instalment loans 190 (355) 126 349 (186) Notes, bonds and other interest-bearing securities 78 (646) 223 348 174 Financial derivatives 111 881 (1 899) (1 713) (1 468) Loans from credit institutions (1) (1) 0 0 1 Senior securities issued (336) 294 1 555 1 004 1 370 Subordinated debt and Hybrid Tier 1 capital instruments (14) (10) 2010 6 12 21 Net unrealised gain/(loss) on financial instruments at fair value 28 163 12 0 (89) 9
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 2 240 2 240 0 0 0 0 0 Instalment loans 193 701 105 571 9 564 0 0 78 566 0 Notes, bonds and other interest-bearing securities 102 158 63 154 20 479 0 4 611 13 914 0 Financial derivatives 22 941 0 21 496 1 445 0 0 0 Total financial assets 321 041 170 965 51 539 1 445 4 611 92 480 0 Loans from credit institutions 650 518 0 0 0 132 0 Commercial paper 155 155 0 0 0 0 0 Senior securities issued 297 479 251 439 0 0 0 0 46 040 Financial derivatives 15 215 0 13 603 1 612 0 0 0 Subordinated debt 1 835 1 835 0 0 0 0 0 Hybrid Tier 1 capital instruments 666 666 0 0 0 0 0 Total financial liabilities 316 000 254 613 13 603 1 612 0 132 46 040 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 10 10 0 0 0 0 0 Instalment loans 170 867 88 677 14 049 0 0 68 142 0 Notes, bonds and other interest-bearing securities 104 111 50 435 38 320 0 2 112 13 244 0 Financial derivatives 24 767 0 23 511 1 256 0 0 0 Total financial assets 299 755 139 122 75 879 1 256 2 112 81 386 0 Loans from credit institutions 1 101 1 009 0 0 0 92 0 Commercial paper 1 101 1 101 0 0 0 0 0 Senior securities issued 281 860 249 309 0 0 0 0 32 552 Financial derivatives 10 255 0 8 816 1 439 0 0 0 Subordinated debt 675 675 0 0 0 0 0 Hybrid Tier 1 capital instruments 277 277 0 0 0 0 0 Total financial liabilities 295 270 252 371 8 816 1 439 0 92 32 552 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 6 857 6 779 0 0 0 78 0 Instalment loans 185 679 103 879 8 375 0 0 73 424 0 Notes, bonds and other interest-bearing securities 88 958 52 200 24 562 0 3 155 9 041 0 Financial derivatives 26 155 0 25 096 1 059 0 0 0 Total financial assets 307 648 162 858 58 032 1 059 3 155 82 544 0 Loans from credit institutions 989 989 0 0 0 0 0 Commercial paper 0 0 0 0 0 0 0 Senior securities issued 288 093 252 697 0 0 0 0 35 396 Financial derivatives 13 067 0 11 121 1 947 0 0 0 Subordinated debt 306 306 0 0 0 0 0 Hybrid Tier 1 capital instruments 672 672 0 0 0 0 0 Total financial liabilities 303 128 254 665 11 121 1 947 0 0 35 396 10
NOTE 4 Instalment loans 30 June 30 June 2010 31 December 2010 Outstanding loans (principal amount) 192 059 168 580 183 881 Accrued interest 1 276 1 030 1 076 Adjustment for fair value 367 1 257 722 Total instalment loans 193 701 170 867 185 679 NOTE 5 Senior securities issued 30 June 30 June 2010 31 December 2010 Senior securities issued (nominal amounts) at 1 January 290 231 224 418 224 418 New issuance 96 642 81 369 138 231 Redemptions (66 230) (51 706) (91 872) Amortisation (215) (279) (374) Translation differences (20 257) 29 566 19 828 Senior securities issued (nominal amounts) at end of period 300 171 283 367 290 231 Accrued interest 2 487 3 009 2 746 Adjustment for fair value (5 178) (4 490) (4 884) Total senior securities issued 297 479 281 886 288 093 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 0 5 241 0 0 0 1 470 3 494 0 10 205 Multilateral development banks 0 5 823 0 0 0 0 11 390 0 17 214 Regional authorities 0 14 616 0 0 596 18 563 11 640 929 46 343 Financial institutions 38 11 241 0 0 2 261 438 79 567 14 624 Securitisation 0 235 0 0 0 0 126 0 361 Covered bond 0 3 620 239 0 0 0 9 551 0 13 411 Total 38 40 775 239 0 2 856 20 471 36 282 1 496 102 158 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 0 13 557 0 0 0 1 531 5 042 0 20 131 Multilateral development banks 0 8 175 0 0 0 0 10 247 0 18 422 Regional authorities 0 10 818 0 0 298 14 118 8 508 0 33 742 Financial institutions 235 21 016 0 103 1 190 2 406 1 126 0 26 076 Securitisation 0 160 0 0 0 24 284 0 469 Covered bond 0 1 105 0 0 0 0 4 167 0 5 272 Total 235 54 833 0 103 1 488 18 079 29 374 0 104 111 11
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 1 221 1 221 Retained earnings 2 649 2 340 Total equity 3 870 3 561 Hybrid Tier 1 capital instruments 666 281 Pre-tax profit for the period (reduced by 50 %) 411 252 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 4 774 3 599 Supplementary capital Subordinated debt 80 80 Perpetual subordinated debt 1 755 562 Total supplementary capital 1 835 642 Total capital 6 609 4 241 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 7 919 0 0 Regional goverments and local authorities 231 320 37 122 2 970 Of which are Norwegian municipalities 192 238 37 122 2 970 Public sector entities 4 212 0 0 Multilateral development banks 17 218 0 0 Financial institutions 27 735 5 050 404 Of which counterparty exposure on derivatives 20 910 4 182 334 Corporates 351 70 6 Claims secured by residential property 1 465 531 42 Covered bonds 11 340 1 134 91 Other assets 13 13 1 Total credit risk 301 573 43 920 3 514 Market risk 30 060 2 086 167 Operational risk (Basic Indicator Approach) 1 714 137 Minimum capital requirements 47 720 3 818 Capital adequacy ratio 13.85% Core capital adequacy ratio 10.00% 12