OP Mortgage Bank Interim Report for January-September 2014

| Source: OP Mortgage Bank plc OP Mortgage Bank plc

OP MORTGAGE BANK
Stock exchange release 24 October 2014, 10.00 am
Interim Report

OP Mortgage Bank Interim Report for January-September 2014

OP Mortgage Bank is part of OP-Pohjola Group. Its role in the Group is to raise, together with Pohjola Bank plc, funding for OP-Pohjola Group from money and capital markets. OP Mortgage Bank is responsible for the Group's funding for the part of covered bond issuance.

Financial standing

The loan portfolio of OP Mortgage Bank (OPA) increased to EUR 9,522 million (7,930)*. The company increased its loan portfolio by buying mortgage-backed loans from OP-Pohjola Group's member banks worth a total of EUR 2,768 million. Between January and September, OPA issued two covered bonds in the international capital market. The one issued in March had a maturity of 7 years, and the one in June 5 years. Both carry a fixed interest rate with a nominal value of EUR 1,000 million. Both bonds got the highest credit ratings from credit rating agencies.

The company's financial standing remained stable throughout the reporting period. Operating profit for January-September amounted to EUR 14.4 (9.8) million.

OPA has hedged against the interest-rate risk associated with its housing loan portfolio through interest-rate OPA has used interest rate swaps to hedge against its interest rate risk. Interest rate swaps have been used to swap housing loan interest and interest on issued bonds into the same basis rate. OPA has entered into all derivative contracts for hedging purposes, with Pohjola Bank plc being their counterparty.

*Comparatives for 2013 are given in brackets. For income-statement and other aggregated figures, January-September  2013  figures serve as comparatives. For balance-sheet and other cross-sectional figures, figures at the end of the previous reporting period (31 December 2013) serve as comparatives

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 2,700 million at the end of September.

Mortgages collateralising covered bonds issued after 1 August 2010, under the Finnish Covered Bonds Act (688/2010), are included in Cover Asset Pool B. The balance of Pool B was EUR 6,464 million at the end of September.

Capital adequacy

OPA has presented its September-end capital base and capital adequacy in accordance with the EU capital requirement regulation and directive (EU 575/2013) (CRR/CRD IV) entered into force on 1 January 2014. Comparatives for 2013 are presented according to CRD III in force on 31 December 2013.

OPA's equity capital was increased in May with an additional investment of EUR 10 million by OP-Pohjola Group Central Cooperative.

OPA's Common Equity Tier 1 (CET1) ratio stood at 125.3% on 30 September.

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 181 member banks as well as Pohjola Bank plc, Helsinki OP Bank Plc, OP Mortgage Bank, OP Card Company Plc and OP Process Services Ltd. 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 control and risk management, their operations in securing liquidity and capital adequacy, and compliance with uniform accounting policies in preparing the amalgamation'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 the ratios following the balance sheet total.

In spite of the joint responsibility and the joint security, pursuant to Section 25 of the Finnish Covered Bonds Act, 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 OP-Pohjola Group Central Cooperative and its Group companies, which reduces the need for more staff.

Administration

The procedures for information and consultation of employees that were started on 12 August 2014 in the Central Cooperative relating to the reorganisation of the management system were brought to a conclusion on 23 September 2014. A total of 113 management positions, excluding operations abroad, were included. As a result 19 will be leaving either as a result of dismissal or other arrangements.

As part of the management system reorganisation, the composition of OPA's Board of Directors was changed by turning it into an intra-group board of directors. The practice is the same for all subsidiaries.

Board of Directors until 1 October 2014:

Chairman Harri Luhtala Chief Financial Officer, OP-Pohjola Group Central Cooperative
Vice Chairman Elina Ronkanen-Minogue Senior Vice President, OP-Pohjola Group Central Cooperative
Members Lars Björklöf Managing Director, Osuuspankki Raasepori
  Sakari Haapakoski Bank Manager, Oulun Osuuspankki
  Mika Helin Executive Vice President, Etelä-Hämeen Osuuspankki
  Hanno Hirvinen Group Treasurer, Pohjola Bank plc
  Jari Tirkkonen Senior Vice President, OP-Pohjola Group Central Cooperative

Board of Directors as of 1 October 2014:

  		 
     
Chairman Harri Luhtala Chief Financial Officer, OP-Pohjola Group Central Cooperative
Members Elina Ronkanen-Minogue Senior Vice President, OP-Pohjola Group Central Cooperative
  Hanno Hirvinen Group Treasurer, Pohjola Bank plc

OPA's Managing Director is Lauri Iloniemi.

OP-Pohjola Group to renew brand: OP-Pohjola becomes simply OP

Financial services provider OP-Pohjola Group is continuing its revamp - this time the focus is on its brand. The changes under way form part of the creation of a new financial services group fully owned by its customers. The group will soon go by the new name of OP Financial Group.

In the future, the banking, Non-life insurance and asset management businesses will all come under the OP brand. There are no plans to dispose the Pohjola brand, and a separate announcement will be made later on its future use.

In addition, Pohjola Bank Plc and Helsinki OP Bank will come together to form a new bank for the Helsinki region: OP Bank Plc. Pohjola Insurance will become OP Insurance. At this moment there will be no changes in the name of OP Mortgage Bank.

The new name of the OP-Pohjola Group, OP Financial Group, will be adopted on 1 January 2015.

Risk exposure

The most significant types of risk related to OPA are credit risk, structural funding risk, liquidity risk and interest-rate risk. The key indicators in use shows that OPA's credit risk exposure is stable and 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. The interest rate risk may be considered to be low.

Outlook

The existing issuance programme will make it possible to issue new covered bonds end of the year 2014. 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.

Accounting Policies

The Interim Report for 1 January-30 September 2014 has been prepared in accordance with IAS 34 (Interim Financial Reporting). In the preparation of the Interim Report, OPA applied the same accounting policies as in the Financial Statements for 2013.

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

The cash flow statement presents the cash flows for the period on a cash basis, divided into cash flows from operating activities, investing activities and financing activities. Cash flows from operating activities include the cash flows generated from day-to-day operations. Cash flow from investing activities includes payments related to PPE and intangible assets, investments held to maturity and shares that are not considered as belonging to cash flow from operating activities. Cash flow from financing activities includes cash flows originating in the financing of operations either on equity or liability terms from the money or capital market. Cash and cash equivalents include liquid assets and receivables from credit institutions payable on demand.  The statement has been prepared using the indirect method.

OPA's related parties include OP-Pohjola Group Central Cooperative and its subsidiaries, the OP Bank Group pension insurance organisation OP Bank Group Pension Fund and OP Bank Group Pension Foundation, and the company's administrative personnel. Standard loan terms and conditions apply to loans granted to the related parties. Loans are tied to generally used reference rates. Related-party transactions did not undergo any substantial changes during the reporting period.

Debt securities issued to the public are carried at amortised cost. The fair value of these debt instruments has been measured using information available in markets and employing commonly used valuation techniques. The difference between the fair value and carrying amount is presented as valuation difference in the Classification of financial assets and liabilities table. The carrying amounts of other balance-sheet items substantially correspond to their fair values.

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 commissions and fees + Net trading income + Total net investment income+ Other operating income) × 100

Income statement  TEUR Q1-
Q3/2014 		Q1-Q3/2013 Q3/2014 Q3/2013 2013
           
Interest income 89,464 60,804 31,248 20,146 81,047
Interest expenses 49,377 36,626 16,187 12,643 49,855
Net interest income 40,086 24,178 15,061 7,503 31,192
Impairment loss on receivables -148 48 17 27 19
Net commissions and fees -22,404 -11,955 -10,114 -4,212 -16,070
Net trading income -1 0 0 0 0
Net investment income 1 1 0 0 1
Other operating income 1 0 0 0 0
Personnel costs 283 325 92 93 449
Other administrative expenses 1,736 1,190 600 375 1,570
Other operating expenses 1,100 932 312 282 1,302
Earnings before tax 14,416 9,825 3,960 2,568 11,821
Income tax expense 2,882 2,405 791 628 2,887
Profit for the period 11,534 7,420 3,169 1,940 8,934

Statement of comprehensive income Q1-Q3/2014 Q1-Q3/2013 Q3/2014 Q3/2013 2013
TEUR          
Profit for the period 11,534 7,420 3,169 1,940 8,934
           
Items that will not be reclassified to profit or loss 0 0 0 0 0
Gains/(losses) arising from remeasurement of defined benefit plans 0 0 0 0 -38
Income tax on gains/(losses) on arising from remeasurement of defined benefit plans 0 0 0 0 -6
Total comprehensive income 11,534 7,420 3,169 1,940 8,889

Key ratios Q1-
Q3/2014 		Q1-Q3/2013 Q3/2014 Q3/2013 2013
Return on equity (ROE), % 4.5 3.0 3.7 2.4 2.7
Cost/income ratio, % 18 20 20 23 22

Cash flow statement  TEUR Q1-Q3/2014 Q1-Q3/2013
Cash and cash equivalents 1 Jan. 110,550 53,300
Total comprehensive income for the period 11,534 7,420
Adjustments to profit for the period 2,207 2,350
Increase (-) or decrease (+) in operating assets -1,661,091 581,207
Increase (+) or decrease (-) in operating liabilities 133,220 -586,348
A. Cash flow from operating activities -1,514,130 4,629
Purchase of intangible assets -675 -647
B. Cash flow from investing activities -675 -647
Increases in debt securities issued to the public 1,993,580 4,690
Decreases in debt securities issued to the public 0 0
Reserve for invested unrestricted equity 10,000 0
Dividends paid 0 -2,001
C. Cash flow from financing activities 2,003,580 2,689
Net increase/decrease in cash and cash equivalents (A+B+C) 488,775 6,671
Cash and cash equivalents 30 September 599,325 59,971
Balance sheet  TEUR 30 Sep  2014 30 Sep  2013 31  Dec 2013  
         
Receivables from credit institutions 599,325 59,971 110,550  
Derivative contracts 252,120 211,255 198,086  
Receivables from customers 9,521,936 8,202,201 7,929,630  
Investments assets 40 17 17  
Intangible assets 2,266 1,579 1,668  
Other assets 92,283 79,324 76,362  
Tax assets 61 26 630  
Total assets 10,468,031 8,554,373 8,316,944  
Liabilities to credit institutions 1,935,372 2,107,000 1,885,000  
Derivative contracts 9,295 8,522 8,767  
Debt securities issued to the public 8,043,326 6,003,280 5,991,695  
Provisions and other liabilities 125,890 104,538 99,628  
Tax liabilities 762 649 0  
Total liabilities 10,114,644 8,223,990 7,985,090  
Shareholders' equity        
  Share capital 60,000 60,000 60,000  
  Reserve for invested unrestricted  . equity 245,000 235,000 235,000  
  Retained earnings 48,387 35,383 36,853  
Total equity 353,387 330,383 331,853  
Total liabilities and shareholders' equity 10,468,031 8,554,373 8,316,944  

Off-balance-sheet commitments  TEUR 30 Sep  2014 30 Sep  2013 31  Dec 2013
Irrevocable commitments given on behalf of customers 3,467 6,437 4,568

Statement of changes in equity  TEUR Share capital Other reserves Retained earnings Total equity
         
Shareholders' equity 1 Jan 2013 60,000 235,000 29,964 324,964
Reserve for invested unrestricted  equity - - - 0
Profit for the period - - 7,420 7,420
Total comprehensive income - - - -
Other changes - - -2,001 -2,001
Shareholders' equity 30 Sep 2013 60,000 235,000 35,383 330,383
         
Shareholders' equity 1 Jan 2014 60,000 235,000 36,853 331,853
Reserve for invested unrestricted equity - 10,000 - 10,000
Profit for the period - - 11,534 11,534
Total comprehensive income - - - -
Other changes - - - -
Shareholders' equity 30 Sep 2014 60,000 245,000 48,387 353,387

  OPA has presented its capital base and capital adequacy of 30 September 2014 in accordance with the EU capital requirement regulation and directive (EU 575/2013) (CRR/CRD IV) entered into force on 1 January 2014.  
  Comparatives for 2013 are presented according to CRD III in force on 31 December 2013.  
       
Capital base and capital adequacy CRD IV CRD IV CRD III  
 TEUR 30 Sep  2014 1 Jan 2014 31  Dec 2013  
         
Shareholders' equity 353,387 331,853 331,853  
Common Equity Tier 1 (CET1) before deductions 353,387 331,853 331,853  
Intangible assets -2,266 -1,668 -1,668  
Excess funding of pension liability, indirect holdings and deferred tax assets for losses 0 0 0  
Planned profit distribution / profit distribution as proposed by the Board -2,250 0 0  
Unrealised gains under transitional provisions 0 0 0  
Impairment loss - shortfall of expected losses -2,026 -2,155 -1,077  
Shortfall of Additional Tier 1 (AT1) 0 0 -1,077  
Common Equity Tier 1 (CET1)*) 346,845 328,031 328,031  
Instruments included in other Tier 1 capital 0 0 0  
Shortfall of Tier 2 capital 0 0 -1,077  
Reclassification into CET1 0 0 1,077  
Additional Tier 1 capital (AT1) 0 0 0  
Tier 1 capital (T1) 346,845 328,031 328,031  
Debenture loans 0 0 0  
Unrealised gains under transitional provisions 0 0 0  
Impairment loss - shortfall of expected losses 0 0 -1,077  
Reclassification into AT1 0 0 1,077  
Tier 2 Capital (T2) 0 0 0  
Total Capital base 346,845 328,031 328,031  
         
Risk-weighted assets        
Credit and counterparty risk 253,331 263,887 263,881  
Market risk 0 0 0  
Operational risk 23,527 19,941 19,941  
Basel I floor 0 0 2,908,024  
Total 276,858 283,827 3,191,845  
         
Key ratios 346,845 328,031 328,031  
CET1 capital ratio 125.3 115.6 10.3  
Tier 1 capital ratio 125.3 115.6 10.3  
Capital adequacy ratio 125.3 115.6 10.3  
         
Basel I floor        
Capital base 346,845 328,031    
Basel I capital requirements floor 315,857 255,348    
Capital buffer for Basel I floor 30,989 72,683    
  *) The row of CET1 based on CRD III figures shows Core Tier as defined by the EBA
  Under CRR, the Basel I floor does not apply to RWAs and becomes a minimum capital requirement.  
  The table above shows capital resources that exceed the Basel I floor.    
  Shortfall of difference between impairment losses and expected losses totals EUR 2 million.  

Classification of financial assets and liabilities TEUR      
Financial assets Loans and  other receivables Recognised at fair value through profit or loss Available  for sale Total
Receivables from credit institutions 599,325 - - 599,325
Derivative contracts - 252,120 - 252,120
Receivables from customers 9,521,936 - - 9,521,936
Shares and participations - - 40 40
Other receivables 92,283 - - 92,283
Other assets 2,327 - - 2,327
Balance at 30 Sep 2014 10,215,871 252,120 40 10,468,031
Balance at 30 Sep 2013 8,343,101 211,255 17 8,554,373
Balance at 31 December 2013 8,118,840 198,086 17 8,316,944
         
Financial liabilities   Recognised at fair value through profit or loss Other liabilities Total
Liabilities to credit institutions - - 1,935,372 1,935,372
Derivative contracts - 9,295 - 9,295
Debt securities issued to the public - - 8,043,326 8,043,326
Subordinated liabilities - - - -
Other liabilities - - 126,651 126,651
Balance at 30 Sep 2014 - 9,295 10,105,349 10,114,644
Balance at 30 Sep 2013 - 8,522 8,215,468 8,223,990
Balance at 31 December 2013 - 8,767 7,976,323 7,985,090
Valuation difference of debt securities issued to the public (difference between fair value and carrying amount) 30 Sept. 2014     327,911 327,911

Derivative contracts 30 Sep 2014  TEUR Nominal values/residual term to maturity
  Less than 1 year 1-5 years More than 5 years Total
Interest rate derivatives        
Hedging 7,466,830 9,134,000 2,396,000 18,996,830
Trading - - - -
Total 7,466,830 9,134,000 2,396,000 18,996,830
         
    Fair values   Credit  
  Assets Liabilities equivalent  
Interest rate derivatives        
Hedging 252,120 9,295 409,244  
Trading - - -  
Total 252,120 9,295 409,244  

Derivative contracts 31 Dec 2013  TEUR Nominal values/residual term to maturity
  Less than 1 year 1-5 years More than 5 years Total
Interest rate derivatives        
Hedging 2,936,007 11,644,865 396,000 14,976,872
Trading - - - -
Total 2,936,007 11,644,865 396,000 14,976,872
         
    Fair values Credit  
  Assets Liabilities equivalent  
Interest rate derivatives        
Hedging 198,086 8,767 325,316  
Trading - - -  
Total 198,086 8,767 325,316  

Grouping of the balance sheet according to the valuation method, TEUR  
         
30 Sep 2014 Valuation of fair value at the end of the period
  Balance sheet value Level 1 Level 2 Level 3
Assets recognised at fair value        
Derivate contracts 252,120 - 252,120 -
Total 252,120 - 252,120 -
Liabilities recognised at fair value        
Derivate contracts 9,295 - 9,295 -
Total 9,295 - 9,295 -
Financial liabilities not recognised at fair value      
Debt securities issued to the public 8,043,326 8,237,901 133,336 -
Total 8,043,326 8,237,901 133,336 -

31 Dec 2013 Valuation of fair value at the end of the period
  Balance sheet value Level 1 Level 2 Level 3
Assets recognised at fair value        
Derivate contracts 198,086 - 198,086 -
Total 198,086 - 198,086 -
Liabilities recognised at fair value        
Derivate contracts 8,767 - 8,767 -
Total 8,767 - 8,767 -
Financial liabilities not recognised at fair value        
Debt securities issued to the public 5,991,695 6,139,724 107,822 -
Total 5,991,695 6,139,724 107,822 -
         
OPA does not hold any transfers between the levels of fair value valuation.  
  Helsinki, 24 October 2014          
             
  OP Mortgage Bank          
  Board of Directors          
             
  For more information, please contact Managing Director Lauri Iloniemi, tel. +358 (0)10 252 3541  
             
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