OP MORTGAGE BANK Interim Report 1 January tember OP Mortgage Bank's (OPA) loan portfolio decreased from EUR 2,980 million on 31 December to EUR 2,704 million on tember. During the reporting period, OPA neither issued covered bonds nor purchased housing loans from OP-Pohjola Group member banks. Earnings Development EUR thousand Q1-Q3/ Q1-Q3/ Q3/ Q3/ Income Net interest income 9,355 9,869 3,455 3,448 13,497 Net commissions and fees -5,843-4,825-1,893-1,913-6,686 Net income from trading 4 7 4 0 7 Net income from investments 1 1 - - 1 Other operating income 26-23 - 0 Total 3,543 5,052 1,588 1,534 6,819 Expenses Personnel costs 145 187 16 50 288 Other administrative expenses 608 531 188 189 737 Other operating expenses 649 712 298 102 877 Total 1,402 1,430 502 341 1,902 Earnings before tax 2,140 3,622 1,086 1,193 4,917 The net interest income for January September totalled EUR 9,355 thousand (9,869) 1. Earnings before tax decreased to EUR 2,140 thousand (3,622). The decline in market rates decreased net interest income and earnings before tax to the extent that the loan portfolio is financed with the shareholders' equity. Net commissions and fees were negative, as in the previous year, with commission income increasing to EUR 1,170 thousand (486) and commission expenses to EUR 7,013 thousand (5,311). Commission expenses stem mainly from commissions paid to OP- Pohjola Group member banks for servicing housing loans. The bank's expenses amounted to EUR 1,402 thousand (1,430). OPA did not recognise any loan losses for the first nine months. Net interest income for July September amounted to EUR 3,455 thousand (3,448) and earnings before taxes EUR 1,086 thousand (1,193). The bank's expenses totalled EUR 502 thousand (341). 1 For balance sheet and other cross-sectional figures, the point of comparison is the figure at the end of. Comparatives deriving from the income statement are based on figures reported for the corresponding period a year ago. 1
Balance Sheet and Off-balance Sheet Commitments OPA's balance sheet total amounted to EUR 2,862 million on tember (EUR 3,149 million) 2. Change in Major Asset and Liability Items EUR Million 30 June 31 March 31 Dec. Balance Sheet 2 862 2 942 3 116 3 149 2 682 Receivables from customers 2 704 2 799 2 899 2 980 2 604 Receivables from financial institutions 33 34 27 32 37 Debt securities issued to the public 2 087 2 091 2 100 2 087 2 019 Liabilities to financial institutions 620 720 800 870 490 Shareholders' equity 89 88 88 87 86 Off-balance sheet commitments 19 16 28 19 16 OPA did not purchase any new housing loans from member banks in January September. The loan portfolio decreased from EUR 2,980 million on 31 December to EUR 2,704 million on tember, since the amount of new housing loans granted directly from OPA's balance sheet to customers was lower than the total amount of repaid loans. On tember, households accounted for 98 % (98) of the loan portfolio and housing corporations for 2 % (2). The bank's non-performing loans increased but remained at low levels totalling EUR 0,8 million (0,2) on September. No impairment losses on loans were recognised. The carrying amount of bonds issued to the public totalled EUR 2,087 million (2,087) on 30 September. In addition to bonds, other funding was based on financing loans granted by Pohjola Bank plc (Pohjola). On tember, financing loans totalled EUR 620 million (870). Shareholders' equity rose to EUR 88.9 million (87.3). Retained earnings amounted to EUR 8.9 million (7.3) at the end of the review period. OPA has hedged against the interest-rate risk associated with its housing loan portfolio through interest-rate swaps, i.e. base rate cash flows from housing loans to be hedged are swapped to short-term Euribor cash flows. OPA has also swapped the fixed interest rates of the bonds it has issued to short-term variable rates. OPA's interest-rate derivative portfolio totalled EUR 4,704 million (4,997). All derivative contracts have been concluded for hedging purposes. Pohjola is the counterparty to all derivative contracts. 2 For balance sheet and other cross-sectional figures, the point of comparison is the figure at the end of. Comparatives deriving from the income statement are based on figures reported for the corresponding period a year ago. 2
Development of Capital Adequacy OPA's capital adequacy ratio stood at 10.8 % on tember. Since the beginning of, OPA has calculated its capital adequacy in compliance with Basel II. Credit risk is calculated according to the standardised approach and the capital requirement for operational risk is calculated using the basic approach. OWN FUNDS, EUR thousand Basel II Basel II Basel II Basel II Basel II 30 June 31 March 31 Dec Tier I 87,644 86,890 86,824 86,394 85,586 of which capital loans - - Tier II 20,000 20,000 20,000 20,000 20,000 Decreases Total 107,644 106,890 106,824 106,394 105,586 Risk-weighted receivables, investments and off-balance sheet commitments 996,072 1,032,313 1,074,236 1,094,191 955,739 Capital adequacy ratio, % 10.8 10.4 9.9 9.7 11.0 Tier I ratio to risk-weighted receivables, investments and off-balance sheet commitments 8.8 8.4 8.1 7.9 9.0 The increase in shareholders' equity arising from the measurement of pension liabilities and the assets covering them, under IFRS, is not considered own funds. Furthermore, intangible assets was also deducted from own funds. Risk-weighted receivables, investments and off balance-sheet commitments, EUR thousand Basel II Basel II Basel II Basel II Basel II 30 June 31 March 31 Dec Receivables and investments 982,338 1,019,096 1,056,923 1,082,926 946,033 Off-balance-sheet items 5,609 5,092 9,188 6,704 5,145 Market risk - - - - - Operational risks 8,125 8,125 8,125 4,561 4,561 Risk-weighted receivables, investments and off balance-sheet commitments, total 996,072 1,032,313 1,074,236 1,094,191 955,739 The decrease in the amount of risk-weighted receivables was due to an decreased loan portfolio. Joint Responsibility and Joint Security OPA is a member of OP-Pohjola Group Central Cooperative, which is the central institution of the amalgamation of OP-Pohjola Group. Within the amalgamation, the resources of OP-Pohjola Group secure the operations of all member banks since, according to Chapter 2, Section 3 of the Act on Cooperative Banks and Other Cooperative Credit Institutions, the Central Cooperative and its member credit institutions are jointly and severally responsible for each other s liabilities and commitments that cannot be paid from the funds of the Central Cooperative or the member credit institution in question. 3
In addition to OPA, Central Cooperative members at the end of the review period included 221 cooperative banks, Pohjola Bank plc, Helsinki OP Bank plc, and OP-Kotipankki Oyj. OP-Pohjola Group's insurance companies do not fall within the scope of joint responsibility. Central Cooperative provides its member banks with instructions governing operations to secure liquidity, capital adequacy and risk management, as well as shared accounting policies. However, pursuant to Section 17 of the Act on Mortgage Credit Banks, the holder of a bond with mortgage collateral shall, notwithstanding the liquidation or bankruptcy of a mortgage credit bank, have the right to receive payment, before other claims, for the entire loan period of the bond, in accordance with the contract terms, from the funds entered as collateral for the bond. Personnel On tember, OPA had three employees. It purchases all key support services from Central Cooperative and its Group companies, which reduces the need for more staff. Administration The Annual General Meeting held in March confirmed the composition of the new Board of Directors. Mr. Jari Himanen was elected as a new member of the Board of Directors, after which the composition of the Board of Directors is as follows: Chairman Harri Nummela Executive Vice President, OP-Pohjola Group Central Cooperative Vice Chairman Mikko Hyttinen Senior Vice President, OP-Pohjola Group Central Cooperative Members Sakari Haapakoski Bank Manager, Oulun Osuuspankki Jari Himanen Managing Director, Etelä-Karjalan Osuuspankki Hanno Hirvinen Executive Vice President, Pohjola Bank plc Heikki Kananen Managing Director, Mäntsälän Osuuspankki Risto Korpela Matti Nykänen Managing Director, Turun Seudun Osuuspankki Senior Vice President, OP-Pohjola Group Central Cooperative Mr. Lauri Iloniemi acted as OPA's Managing Director. Events after the review period Shareholders' equity increased by EUR 50 million after OP-Pohjola Group Central Cooperative made an additional investment in the company. OPA increased its loan portfolio after the review period when it purchased housing loans from OP- Pohjola Group member banks for EUR 1,786 million. Prospects for the rest of the year The macroeconomic development in Finland deteriorated during the review period. This has led to increased unemployment rates and increased bankruptcy levels. The overall quality of OPA's credit portfolio is expected to remain strong in spite of the deteriorating economic outlook. The earnings before taxed for are forecasted to fall below the earnings of due to the more expensive funding costs and the decline in market rates. The decline in market rates will decrease the bank's net interest income and profit to the extent that the loan portfolio is financed with the shareholders' equity. 4
OPA is planning to issue a new bond with real estate collateral to the international capital markets this year. Income Statement EUR thousand Q1 Q3/ Q1 Q3/ Q3/ Q3/ Interest income 54,924 87,487 11,332 35,727 121,827 Interest expenses 45,568 77,618 7,877 32,279 108,330 Net interest income 9,355 9,869 3,455 3,448 13,497 Net commissions and fees -5,843-4,825-1,893-1,913-6,686 Net income from trading 4 7 4 0 7 Net income from investments 1 1 - - 1 Other operating income 26-23 - 0 Personnel costs 145 187 16 50 288 Other administrative expenses 608 531 188 189 736 Other operative expenses 649 712 298 102 878 Earnings before tax 2,140 3,620 1,086 1,193 4,917 Income taxes 549 943 284 356 1,282 Profit for the period 1,591 2,677 802 836 3,634 Key Ratios Q1 Q3/ Q1 Q3/ Q3/ Q3/ Return on equity (ROE), % 2.4 4.8 3.7 3.9 4.8 Cost/income ratio, % 40 28 32 22 28 Calculation of key ratios Return on equity, % = Annualised profit for the period / Equity capital (average equity capital at the beginning and end of the period) 100 Cost/income ratio, % = Personnel costs + Other administrative expenses + Other operating expenses / Net interest income + Net commission income + Net income from trading + Total net income from investments + Other operating income 100. 5
Balance Sheet 30 June 31 March 31 Dec EUR thousand Receivables from financial institutions 33,000 34,431 27,347 32,255 36,875 Derivative contracts 89,753 94,114 103,233 74,075 649 Receivables from customers 2,703,595 2,799,055 2,898,547 2,979,704 2,604,195 Investments assets 17 17 17 17 17 Intangible assets 975 923 750 643 547 Tangible assets 1 2 1 1 1 Other assets 34,144 13,517 85,827 62,397 39,524 Tax receivables 33 121 2 0 Total assets 2,861,519 2,942,179 3,115,722 3,149,091 2,681,809 Liabilities to financial institutions 620,000 720,000 800,000 870,000 490,000 Derivative contracts 5,843 8,538 10,595 14,893 6,206 Debt securities issued to the public 2,087,102 2,091,479 2,100,153 2,086,535 2,019,228 Reserves and other liabilities 39,526 13,894 96,963 70,178 59,162 Tax liabilities 156 171 168 168 852 Subordinated debt securities 20,000 20,000 20,000 20,000 20,000 Total liabilities 2,772,627 2,854,083 3,027,879 3,061,774 2,595,448 Shareholders equity Share capital 60,000 60,000 60,000 60,000 60,000 Reserve for invested unrestricted. equity 20,000 20,000 20,000 20,000 20,000 Retained earnings 8,892 8,096 7,843 7,317 6,362 Total equity 88,892 88,096 87,843 87,317 86,362 Total liabilities and shareholders equity 2,861,519 2,942,179 3,115,722 3,149,091 2,681,809 Off-balance Sheet Commitments EUR thousand 30 June 31 March 31 Dec Binding credit commitments 17,949 16,346 27,973 19,145 15,983 Change Calculation on Shareholders Equity EUR thousand Share capital Retained earnings Total equity Shareholders equity 1 January 60,000 3,681 63,681 Reserve for invested unrestricted equity 20,000 20,000 Distribution of profit - - - Profit for the period 2,680 2,680 Shareholders equity tember 80,000 6,362 86,362 EUR thousand Share capital Retained earnings Total equity Shareholders equity 1 January 60,000 7,317 67,317 Reserve for invested unrestricted equity 20,000 20,000 Distribution of profit - - - Profit for the period 1,591 1,591 Other -16-16 Shareholders equity tember 80,000 8,892 88,892 6
Cash Flow Statement EUR thousand Q1 Q3/ Q1 Q3/ Liquid assets 1 January 18,380 15,266 Cash flow from operations 16,147-981,662 Cash flow from investments -423-95 Cash flow from financing -14,991 979,495 Liquid assets tember 19,113 13,004 The cash flow statement presents the cash flows for the period on the cash basis, divided into cash flows from operations, investments and financing. Cash flows from operations includes the cash flows generated from day-to-day operations. Cash flow from investments includes payments related to tangible and intangible assets, investments held to maturity and shares that are not considered as belonging to cash flow from operations. Cash flow from financing includes cash flows originating in the financing of operations either on equity or liability terms from money or capital market. Liquid assets include cash in hand and receivables from financial institutions payable on demand. The statement has been prepared using the indirect method. Fair values of financial assets and liabilities EUR 1,000 Loans and receivables Recognised at fair value through profit or loss Available for sale Total Financial assets Receivables from financial institutions 33,000 - - 33,000 Derivative contracts - 89,753-89,753 Receivables from customers 2,703,595 - - 2,703,595 Equities - - 17 17 Other receivables 35,154 - - 35,154 Balance at tember 2,771,749 89,753 17 2,861,519 Balance at tember 2,681,143 649 17 2,681,809 Balance at 31 December 3,075,000 74,075 17 3,149,091 Recognised at fair value EUR 1,000 through profit or loss Other liabilities Total Liabilities to financial institutions - - 620,000 620,000 Derivative contracts - 5,843-5,843 Debt securities issued to the public - - 2,087,102 2,087,102 Subordinated liabilities - - 20,000 20,000 Other liabilities - - 39,682 39,682 Balance at tember - 5,843 2,766,784 2,772,627 Balance at tember - 34,911 2,569,239 2,604,150 Balance at 31 December - 14,893 3,046,881 3,061,774 Debt securities issued to the public are carried at amortised cost. On 30 June, the fair value of these debt instruments was approximately EUR 101,155 thousand higher than their carrying amount, based on information available in markets and employing commonly used valuation techniques. Subordinated liabilities are carried at amortised cost. Their fair value are substantially lower than their carrying amount, but determining fair values realiably is difficult in the current market situation. 7
Derivative Contracts 30.9. EUR thousand Nominal values/the remaining maturity Fair values Less than 1 year 1 5 years More than 5 years Total Assets Liabilities Credit countervalue Interest rate derivatives Hedging 2,005,720 2,697,887 -, 4,703,607 89,753 5,843 128,138 Trading - Total 2,005,720 2,697,887 0 4,703,607 89,753 5,843 128,138 Derivative Contracts 30.9. EUR thousand Nominal values/the remaining maturity Fair values Less than 1 year 1 5 years More than 5 years Total Assets Liabilities Credit countervalue Interest rate derivatives Hedging 53,000 4,602,061, 4,655,061 649 6,203 36,126 Trading - - - - - - - Total 53,000 4,602,061, 4,655,061 649 6,203 36,126 All derivative contracts have been entered into for hedging purposes, regardless of their classification in accounting. The interim report is unaudited. Helsinki, 5 November OP Mortgage Bank Board of Directors 8