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OP Mortgage Bank (70ZM)

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Wednesday 31 October, 2012

OP Mortgage Bank

OP Mortgage Bank : 3rd Quarter Results

OP Mortgage Bank : 3rd Quarter Results

OP Mortgage Bank
Interim report for January-September 2012
31 October 2012, 9.00 am EET

INTERIM REPORT FOR JANUARY-SEPTEMBER 2012

OP Mortgage Bank's (OPA) loan portfolio increased to EUR 8,511 million in the January-September period (EUR 7,535 million at the end of 2011). The bank increased its loan portfolio in February, in March and in May when it purchased housing loans from OP-Pohjola Group member cooperative banks. OPA launched a covered bond issue at a nominal valued of EUR 1.25 billion in May. In August OPA carried out two covered Private Placements, one at a nominal value of EUR 25 million and one at a nominal value of EUR 75 million.

Earnings Development

EUR thousandQ1-Q3/2012Q1-Q3/2011Q3/2012Q3/20112011
Income
Net interest income21,98718,5877,6486,71624,147
Net commissions and fees-8,566-7,342-3,143-2,756-10,207
Net income from trading00000
Net income from investments-186487-7486487
Other operating income515
Total13,23511,7364,4984,44714,432
Expenses
Personnel costs2782087758278
Other administrative expenses1,1961,5673545212,054
Other operating expenses1,1591,1054533751,396
Total2,6342,8808839543,728
Impairments of receivables-360-10-359
Earnings before tax10,5658,8563,6143,49310,345

The net interest income for January-September totalled EUR 21,987 thousand (18,587)[1]. Earnings before tax amounted to EUR 10,565 thousand (8,853). Increase in net interest income was due to the growth in the loan portfolio. Impairment loss on loans on a collective basis of EUR 36 thousand was recognised.

Net commissions and fees were negative with commission income increasing to EUR 3,854 thousand (2,623) and commission expenses to EUR 12,421 thousand (9,966).  Commission expenses mainly comprise commissions paid to OP-Pohjola Group member banks for servicing housing loans. The bank's expenses amounted to EUR 2,634 thousand (2,880).

Net interest income for July-September grew to EUR 7,648 thousand (6,716) and earnings before taxes to EUR 3,614 thousand (3,493). The bank's expenses decreased to EUR 883 thousand (954).  

Balance Sheet and Off-balance Sheet Commitments

OPA's balance sheet total amounted to EUR 8,976 million on 30 September (EUR 7,912 million) [2].

Change in Major Asset and Liability Items

EUR Million 30 Sep 201230 June 201231 March 201231 Dec 201130 Sep 2011
Balance Sheet8,9769,2638,4277,9127,743
Receivables from customers8,5118,8418,0007,5357,395
Receivables from financial institutions7793728293
Debt securities issued to the public5,8795,7165,4405,4235,389
Liabilities to financial institutions2,6503,1002,4902,0701,980
Shareholders' equity312310287256215
Off-balance sheet commitments911845

The loan portfolio increased from EUR 7,535 million on 31 December 2011 to EUR 8,511 million on 30 September 2012. OPA increased its loan portfolio in the review period when it purchased housing loans from OP-Pohjola-Group member banks for EUR 1,943 million.

On 30 September, households accounted for 99.6 % (99.3) of the loan portfolio and housing corporations for 0.4 % (0.7). The bank's non-performing loans amounted to EUR 2.7 million (2.1).
The impaired amount for an impairment loss on an individual basis recognised in the review period was fully covered by collateral.

The carrying amount of bonds issued to the public totalled EUR 5,879 million (5,423) on 30 September. OPA issued its seventh covered bond at a nominal value of EUR 1.25 billion on international capital markets in April. Moody's Investor Services and Standard & Poor's Rating Services have given the bond their highest credit ratings of Aaa and AAA. In August OPA carried out two covered Private Placements, one at a nominal value of EUR 25 million and one at a nominal value of EUR 75 million. The covered bond issued in 2007 at a nominal value of EUR 1 billion matured and were paid off in June. In addition to bonds, other funding was based on financing loans granted by Pohjola Bank plc (Pohjola). On 30 September, financing loans totalled EUR 2,650 million (2,070).

Shareholders' equity rose to EUR 312 million (256). Retained earnings amounted to
EUR 27.3 million (21.3) 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 15,598 million (14,409). All derivative contracts have been concluded for hedging purposes. Pohjola is the counterparty to all derivative contracts.

Collateralisation of bonds issued to the public

Mortgages collateralising covered bonds issued before 1 August, 2010, under the Finnish Act on Mortgage Credit Banks 1240/1999, are included in Cover Asset Pool A. The balance of Pool A was EUR 3,200 million in the end of September.

Mortgages collateralising covered bonds issued after 1 August, 2010, under the Finnish Act on Mortgage Credit Banks 680/2010, are included in Cover Asset Pool B. The balance of Pool B was EUR 4,786 million in the end of September.

Development of Capital Adequacy

OPA's capital adequacy ratio stood at 9.1 % on 30 September. Capital ratio excluding transition rules stood at 40.8%. Shareholder's equity increased by EUR 30 million in March and by EUR 20 million in May when OP-Pohjola Group Central Cooperative made an additional investment in OPA.  In May OPA called in the Tier 2 debenture issued in 2007 at a nominal value of EUR 20 million.

OPA calculates its capital adequacy in compliance with Basel II. In its calculation of capital requirements for credit risk, OPA has adopted the Internal Ratings Based Approach (IRBA). With respect to the capital adequacy requirement for operational risks, OPA adopted the Standardised Approach in the report period. Before 31 December comparison for credit risk here below are presented according to the Standardised Approach.

OWN FUNDS, EUR thousand30 Sep
2012
31 Dec
2011
30 Sep 2011
Equity capital312,250256,475215,176
Intangible assets-547-587-661
Excess funding of pension liability and
fair value measurement of investment property
-17-248-
Planned dividend distribution--2,001-235
Shortfall of impairments - expected losses-3,634-3 ,937-
Shortfall of other Tier 1 capital-3,634--
Core Tier 1 capital304,418249,703214,280
Shortfall of Tier 2 capital- 3,634--
Transfer to core Tier 1 capital3,634--
Tier 1 capital304,418249,703214,280
Debenture loans-20,00020,000
Shortfall of impairments - expected losses-3,634-3 ,937-
Transfer to Tier 1 capital3,634--
Tier 2 capital-16,06320,000
Total capital base304,418265,765234,280
Capital ratio including transition rules
Capital adequacy ratio, %9,19.08,7
Tier 1 ratio to risk-weighted commitments9,18.57,9
Core Tier 1 ratio9,18.57,9
Capital ratio excluding transition rules
Capital adequacy ratio, %40,840.4-
Tier 1 ratio to risk-weighted commitments40,840.0-
Core Tier 1 ratio40,840.0-

The increase in shareholders' equity arising from the additional investment and 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. The Impairments - shortfall of expected losses total EUR 7.3 million.

Risk-weighted receivables, investments and off balance-sheet commitments,  EUR thousand30 Sep
2012
31 Dec
2011
              30 Sep 2011
 Receivables and investments721,260644,7032,687,418
  Off-balance-sheet items10,1612,0631,653
 Market risk---
 Operational risks14,04310,49010,490
 Requirement for period of transition2,600,5862,283,433-
Risk-weighted receivables, investments and off balance-sheet commitments, total3,346,0512,940,6882,699,561

The increase in the amount of risk-weighted receivables was due to a decreased loan portfolio.

Joint Responsibility and Joint Security

Under the Act on Cooperative Banks and Other Cooperative Credit Institutions, the
amalgamation of the cooperative banks comprises the organisation's central institution
(OP-Pohjola Group Central Cooperative), the Central Cooperative's member credit
institutions and the companies belonging to their consolidation groups. This
amalgamation is monitored on a consolidated basis. The Central Cooperative and its
member banks are ultimately responsible for each other's liabilities and commitments.

The Central Cooperative's members at the end of the report period comprised
OP-Pohjola Group's 196 member banks as well as Pohjola Bank plc, Helsinki OP Bank Plc, OP Mortgage Bank and OP-Kotipankki Oyj. OP-Pohjola Group's insurance companies do not fall within the scope of joint responsibility.

The central institution is obligated to provide its member credit institutions with instructions on their internal supervision and risk management, their operations in securing liquidity and capital adequacy, and compliance with uniform accounting principles in preparing the coalition's consolidated financial statements.

The central institution and its member credit institutions are jointly responsible for the liabilities of the central institution or a member credit institution placed in liquidation or bankruptcy that cannot be paid from its assets. The liability is divided between the central institution and the member credit institutions in ratios following the balance sheet total.

In spite of the joint responsibility and the joint security, pursuant to Section 25 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 30 September, OPA had six 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. Lars Björklöf, Managing Director, Osuuspankki Raasepori was elected as a new member of the Board of Directors. Mr. Heikki Kananen, Managing Director, Mäntsälän Osuuspankki and Mr. Mikko Rosenlund, Managing Director, Tampereen Seudun Osuuspankki were left out of the Board of Directors. The Board composition is as follows:

ChairmanHarri LuhtalaChief Financial Officer, OP-Pohjola
Group Central Cooperative
Vice ChairmanElina Ronkanen-MinogueSenior Vice President, OP-Pohjola
Group Central Cooperative
MembersSakari HaapakoskiBank Manager, Oulun Osuuspankki
Mika HelinExecutive Vice President, Hämeenlinnan
Seudun Osuuspankki
Hanno HirvinenExecutive Vice President, Pohjola Bank plc
Mikko HyttinenBank Manager, OP-Pohjola Group
Central Cooperative
Lars BjörklöfManaging Director, Osuuspankki Raasepori

Managing Director       Lauri Iloniemi.

Risk exposure

The most significant types of risk related to OPA are credit risk, liquidity risk and interest-rate risk. The indicators in use shows that OPA's credit risk exposure is stable. The limit for liquidity risk set by the Board of Directors has not been exceeded. The liquidity buffer for OP-Pohjola Group, managed by Pohjola Bank plc, is exploitable by OPA.  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. The interest-rate risk may be considered to be low.

Prospects for the rest of the year

The existing issuance programme will make it possible to issue new covered bonds in 2012. It is expected that the Company's capital adequacy will remain strong, risk exposure will be favourable and the overall quality of the credit portfolio will remain strong.

Income Statement

EUR thousandQ1-Q3/2012Q1-Q3/2011Q3/2012Q3/20112011
Interest income97,64493,30927,11839,555133,180
Interest expenses75,65774,72219,47132,839109,034
Net interest income21,98718,5877,6486,71624,147
Impairments of receivables-360-10-359
Net commissions and fees-8,566-7,342-3,143-2,756-10,207
Net income from trading00000
Net income from investments-186487-7486487
Other operating income05015
Personnel costs2782087758278
Other administrative expenses1,1961,5673545212,054
Other operative expenses1,1591,1054533751,396
Earnings before tax10,5658,8563,6143,49310,345
Income taxes2,5862,3048859092,687
Profit for the period7,9796,5522,7292,5847,658

Statement of comprehensive income

EUR thousandQ1-Q3/2012Q1-Q3/2011Q3/2012Q3/20112011
Profit for the period7,9796,5522,7292,5847,658
Actuarial gains/losses on post-employment benefit obligations--29--10-38
Income tax on actuarial gains/losses on post-employment benefit obligations-7-26
Other Statement of comprehensive income items -----
Total comprehensive income7,9796,5312,7292,5777,626

Key Ratios

Q1-Q3/2012Q1-Q3/2011Q3/2012Q3/20112011
Return on equity (ROE), %3.74.73.54.83.7
Cost/income ratio, %2025202126

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

Balance Sheet

EUR thousand30 Sep
2012
30 June 201231 March 201231 Dec 201130 Sep 2011
Receivables from financial institutions76,59592,82372,06082,43493,075
Derivative contracts304,833247,456215,138198,380165,305
Receivables from customers8,511,4438,841,1287,999,7547,534,5577,394,937
Investments assets1717171717
Intangible assets881809739587661
Tangible assets-----
Other assets81,76580,854139,59096,06088,555
Tax receivables20198130
Total assets8,975,5559,263,1068,427,3067,912,0487,742,551
Liabilities to financial institutions2,650,0003,100,0002,490,0002,070,0001,980,000
Derivative contracts18,38321,54515,71611,2126,233
Debt securities issued to the public5,878,7465,716,1005,439,8375,423,0855,388,949
Reserves and other liabilities114,473114,829174,277131,213130,591
Tax liabilities1,7031,1127552671,601
Subordinated debt securities--20,00020,00020,000
Total liabilities8,663,3058,953,5858,140,5867,655,7777,527,374
Shareholders' equity
  Share capital60,00060,00060,00060,00060,000
  Reserve for invested unrestricted              . equity225,000225,000205,000175,000135,000
  Retained earnings27,25024,52121,72021,27120,176
Total equity312,250309,521286,720256,271215,176
Total liabilities and shareholders' equity8,975,5559,263,1068,427,3067,912,0487,742,551

Off-balance Sheet Commitments

EUR thousand30 Sep 201230 June 201231 March 201231 Dec 201130 Sep
2011
Binding credit commitments8,97310,8837,8693,6924,597

Statement of Changes in Equity

EUR thousandShare capitalOther reservesRetained earningsTotal equity
Shareholders' equity 1 Jan 201160,00085,00013,646158,646
Reserve for invested unrestricted  equity-50,000-50,000
Profit for the period--6,5316,531
Other changes----
Shareholders' equity 30 Sep 201160,000135,00020,176215,176
EUR thousandShare capitalOther reservesRetained earningsTotal equity
Shareholders' equity 1 Jan 201260,000175,00021,271256,271
Reserve for invested unrestricted equity-50,000-50,000
Profit for the period--7,9797,979
Other changes---2,001-2,001
Shareholders' equity 30 Sep 201260,000225,00027,250312,250

Cash Flow Statement

EUR thousandQ1-Q3/2012Q1-Q3/2011
Liquid assets 1 January82,43461,673
Cash flow from operations-281,109-2,008,222
Cash flow from investments-5372
Cash flow from financing275,8072,039,623
Liquid assets 30 September76,59593,076

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 include 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.

Classification of financial instruments
EUR 1,000 Loans and  receivablesRecognised at fair value through profit or loss Available for saleTotal
Assets
Receivables from financial institutions76,595--76,595
Derivative contracts-304,833-304,833
Receivables from customers8,511,443-8,511,443
Equities--1717
Other receivables81,785--81,785
Balance at 30 September 20128,669,824304,833178,974,674
Balance at 30 September 20117,576,567165,305177,741,889
Balance at 31 December 20117,713,051198,380177,911,448
EUR 1,000Recognised at fair value through profit or lossOther
liabilities
Total
Liabilities
Liabilities to financial institutions--2,650,0002,650,000
Derivative contracts-18,383-18,383
Debt securities issued to the public--5,878,7465,878,746
Subordinated liabilities---0
Other liabilities--116,176116,176
Balance at 30 September 2012-18,3838,644,9238,663,305
Balance at 30 September 2011-6,2337,521,1417,527,374
Balance at 31 December 2011-11,2127,644,5647,655,777

Debt securities issued to the public are carried at amortised cost.  On 30 September 2012, the fair value of these debt instruments was approximately EUR 307,266 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 values are substantially lower than their carrying amount, but determining fair values reliably is difficult in the current market situation.

Derivative Contracts 30 September 2012

EUR thousandNominal values/the remaining maturityFair valuesCredit counter-value
Less than 1 year1-5 yearsMore than 5 yearsTotalAssets Liabilities
Interest rate derivatives
Hedging603,88012,993, 9722,000,00015,597,853304,83318,383457,660
Trading
Total603,88012,993, 9722,000,00015,597 853304,83318,383457,660

Derivative Contracts 30 September 2011

EUR thousandNominal values/the remaining maturityFair valuesCredit counter-value
Less than 1 year1-5 yearsMore than 5 yearsTotalAssets Liabilities
Interest rate derivatives
Hedging4,784,2867,500,0002,000,00014,284, 286165,3056,233291,731
Trading
Total4,784,2867,500,0002,000,00014,284, 286165,3056,233291,731

All derivative contracts have been entered into for hedging purposes, regardless of their classification in accounting.

Related-party transactions

OPA's related parties include OP-Pohjola Group Central Cooperative and its subsidiaries, the
OP-Pohjola Group pension insurance organisations OP-Pension Fund and OP-Pension Foundation, and the company's administrative personnel. Standard terms and conditions for credit are applied to loans granted to the related parties. Loans are tied to generally used reference rates. Related-party transactions have not undergone any substantial changes since 31 December 2011.

Accounting policies

The Interim Report for 1 January - 30 September 2012 has been prepared in accordance with IAS 34 (Interim Financial Reporting), as approved by the EU. In the preparation of this Interim Report, OPA substantially applied the same accounting policies as in the financial statements 2011, except a change in the recognition of actuarial gains and losses on defined benefit pension plan.

Change in accounting policies

OPA has decided to voluntarily abandon as of the beginning of 2012 the so-called corridor method in the recognition of actuarial gains and losses on defined benefit pension plans. In accordance with the revised recognition method under IAS 19, actuarial gains and losses are recognised outside profit or loss in comprehensive income as a debit item or credit item in equity for the period during which they occur. When recognising actuarial gains and losses in other comprehensive income, these gains and losses cannot be reclassified through profit or loss in subsequent periods. OPA has applied the change in the accounting policy retrospectively.
The effects of the changed accounting policy on the comparatives of the consolidated balance sheet, income statement and statement of comprehensive income shown in this Interim Report are as follows:

EUR thousandPrevious
accounting policy
New accounting policyEffect of change in accounting policy
Balance sheet 1 Jan 2011
Assets
Other assets48,79048,583-207
Liabilities
Tax liabilities342288-54
Shareholders' equity
Retained earnings13,79913,646-153

EUR thousandPrevious
accounting policy
New accounting policyEffect of change in accounting policy
Balance sheet 31 Dec 2011
Assets
Other assets96,30196,060-241
Tax assets-1313
Liabilities
Tax liabilities313267-46
Shareholders' equity
Retained earnings21,45421,271-183

Income statement 2011
Personnel costs282278-4
Income tax expense2,6862,6871
Statement of comprehensive income 2011
Actuarial gains/losses on post-employment benefit obligations--38-38
Income tax on actuarial gains/losses on post-employment benefit obligations-66

EUR thousandPrevious
accounting policy
New accounting policyEffect of change in accounting policy
Balance sheet 30 September 2011
Assets
Other assets88,78888,555-233
Liabilities
Tax liabilities1,6611,601-61
Shareholders' equity
Retained earnings20,34920,176-172

EUR thousandPrevious
accounting policy
New accounting policyEffect of change in accounting policy
Income statment Q1-Q3/2011
Personnel costs 211208-3
Income tax expense2,3032,3041
Statement of comprehensive income Q1-Q3/2011
Actuarial gains/losses on post-employment benefit obligations--29-29
Income tax on actuarial gains/losses on post-employment benefit obligations-77

This Interim Report is based on unaudited figures. Given that all figures have been rounded off, the sum total of individual figures may deviate from the presented sums.

Helsinki, 31 October 2012

OP Mortgage Bank
Board of Directors

For further information, please contact Mr Lauri Iloniemi, Managing Director, tel. +358 10 252 3541
[1]  For balance sheet and other cross-sectional figures, the point of comparison is the figure at the end of 2011. For income statement and other cumulative figures, the point of comparison is the figure for January-September period in the previous year.
[2]  For balance sheet and other cross-sectional figures, the point of comparison is the figure at the end of 2011. For income statement and other cumulative figures, the point of comparison is the figure for January-September period in the previous year.




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