the co-operative bank plc interim financial report 2010

The Co-operative Bank plcInterim financial report 2010

The Co-operative Bank plc 1

Highlights 2

Purpose, givens, vision and values 3

Business and financial review 4

Principal risks 8

Capital management 17

Independent review report 18

Condensed financial statements:

Consolidated income statement 19

Consolidated statement of comprehensive income 20

Consolidated balance sheet 21

Consolidated statement of cash flows 22

Consolidated statement of changes in equity 23

Basis of preparation and accounting policies 24

Notes to the interim financial report 25

Responsibility statement 34

Notice to shareholders 35

Contents

Highlights

2 The Co-operative Bank plc

• Co-operativeBankprofitbeforetax,distributionsandfairvalueamortisationwas£58.2m(2009:£24.9m)

• Profitbeforedistributionsandtaxwas£35.6m(2009:£24.9m)

• Balancesheetassetsof£45.7bn(December2009:£46.1bn),withcustomerlendingmaintainedandasset quality improved

• Newlendingtoconsumers£1.1bnandbusinesses£0.4bn

• Bankcapitalratioof13.2%andcoretier1ratio8.7%(December2009:13.5%and8.7%respectively)

• Stronggrowthincustomerdepositsof£1.4bn(4.2%)inthefirsthalfof2010

• Increasedcustomerfundingratioof110%(December2009:104%)

• RecognisedastheWorld’sMostSustainableBankbytheFinancialTimes

• Successfulintegrationoftwocomplementarybusinessesoverthelasttwelvemonths

• Full-yearsynergytarget(followingthemergerlastyear)isontracktobeexceeded

• Successfulimplementationofmarket-leadingbusinessbankingsuite,thefirstreleaseofaprogrammetotransformCFS’sbankingcapability


Ourstrategyismadeupofourpurpose,givens,values,visionandourbusinessplans.Togethertheyhelpdefineusasabusiness,setthedirectionandinformthedecisionswemakeandhowwebehave.

Our purpose Ourpurposeistobeapioneeringbusinessdeliveringsustainablefinancialservicesformembersandsociety.

Our givens• wechampionco-operativevaluesandprinciplesandethics;• wearefinanciallyprudentandstrong;• weshareprofitswithmembers;and• weonlydobusinessconsistentwithourvaluesandprinciples.

Our valuesOur values describe what is important to our organisation and guide our behaviours by determining how weinteractwitheachotherandourcustomers.Bylivingourvalues,wewilldeliveraconsistentandpositivecustomerexperienceeverytime.

As a co-operative business:• weputourmembersandcustomersfirstinallwedo;• wetakepersonalandsocialresponsibility;• togetherwewillcreateagreatplacetowork,growanddevelop;• westriverelentlesslytobefaster,better,moresuccessful;and• weareopenandfairandarecommittedtoexcellentcommunication.

Our visionTobetheUK’smostadmiredfinancialservicesbusiness.

Purpose, givens, vision and values


In a world where the traditional financial services model has been tested and found wanting, the Co-operative Bank and its parent, the Co-operative FinancialServices(CFS)areproudtobedifferent.Asamember-owned,customer-ledandethically-guidedbusiness,theCo-operativeBankhasincreasinglydifferentiated itself by its prudent financial stewardship, its consistent approach to customer service and its concern for its impact, not just on customers butoncommunitiesandtheenvironmentasawhole.This‘co-operativedifference’wasrecentlyrecognisedbytheFinancialTimesinnamingCFStheWorld’sMostSustainableBank.

Asasustainablealternativetothetraditionalfinancialservicesmodel,theCo-operativeBankhasshownitselfwellplacedtocapitaliseoncurrentmarketconditions.Despitemacro-economicconcernsaroundgrowthandunemploymentandthechallengesofalowinterestrateenvironment,theCo-operativeBank has benefited from the diversity of its businesses, its strong brands together with the stability of its customer relationships and comprehensive productrange,supportedbyaflexibledistributionmodel.

Overthelasttwelvemonths,followingthemergerwithBritanniaBuildingSociety,theCo-operativeBankhassuccessfullyintegratedtwocomplementarybusinesses.Theearly establishmentof a singleexecutive, strategyandseniormanagement structureallowed thebusiness tomovequicklybeyondstabilisationintotransformation.

Thisfar-reachingprocessencompassespeople,processesandsystemsandisalreadydeliveringanenhancedcustomerexperience.Anactiveintegrationprogramme,launchedinthewakeoflastyear’smerger,hasalreadydeliveredsignificantcostsynergies–indeedtheCo-operativeBankisontracktoexceeditsfull-yeartarget.Theprogrammebenefitsfromastrongtrackrecordinbothheritagebusinessesandgoodprogressisbeingmadeinmovingtowardsanintegratedcustomerproposition.

Looking to the longer term, a fundamental organisation design process has been successfully implemented, while the transformation of the Co-operative Bank’sbankingsystemsinfrastructurehascommencedwiththeimplementationofamarket-leadingbusinessbankingsuite.SignificantfurtherinvestmentisplannedtoensurethattheCo-operativeBank’sinfrastructurematchestheCFSambitiontobetheUK’smostadmiredfinancialservicesbusiness.

Highlights Profitbeforetax,distributionsandfairvalueamortisationtothehalfyearof£58.2mis£33.3mhigherthanthefirsthalfof2009.

These results reflect the merger with Britannia, business success in strengthening underlying profitability despite the challenges of the current economic environmentandtheongoingweaknessinthefinancialservicessectorinparticular.Inaddition,underlyingcapitalandliquiditypositionsremainstrong,layingthefoundationsforstablegrowth. TheCo-operativeBank’scapitalratiowas13.2%,withatier1ratioof9.0%andacoretier1ratioof8.7%.ThisissubstantiallyunchangedfromDecember2009,illustratingarobustongoingcapitalposition.Customerdepositshaveseenexcellentgrowthof£1.4bn(4.2%)inthefirsthalfof2010reflecting97%retentionoffixed-rateISAbalancesandtheattractionofsignificantnewfunds,whilstacustomer-fundingratioof110%showsasubstantialincrease(104%atDecember2009).

Profitbeforetaxwas£28.9m,16.1%aheadofthefirsthalfof2009.Firsthalfprofitsreflectachargeof£22.6mfortheamortisationoffairvalueswhichwerecreatedatthetimeofthemerger.

In thefirsthalfof2010aprofitdistributionof£6.7mhasbeenmade to theCo-operativeGroup forpayment to individualmembersbasedon theirtransactionswithCFSfortheperiodto31December2009.In2009,thedividendwasrecognisedinthesecondhalfoftheyear.Thisdoesnotincludeadistributiontoex-Britanniamembers,whoreceivedapaymentof£19.0minMarch2010inrelationtotheyearended31December2009;thiswasprovidedforintheBritanniaBuildingSocietycessationaccountsfortheperiodto31July2009.

Business and financial review


The Co-operative Bank operating result and profit before taxation

2010 2009 Change Change £m £m £m %

Income 403.2 295.7 107.5 36.4%Operatingcosts–steadystate (265.6) (175.6) (90.0) -51.3%Operatingcosts–strategicinitiatives (15.2) (5.4) (9.8) -181.5%Impairment losses (43.0) (73.0) 30.0 41.1%

Operating result 79.4 41.7 37.7 90.4%

Significantitems (18.3) (14.6) (3.7) -25.3%Shareofpost-taxprofitsfromjointventures 0.4 – 0.4 –Financialservicescompensationschemelevies (3.3) (2.2) (1.1) -50.0%

Profit before tax, distributions and fair-value amortisation 58.2 24.9 33.3 133.7%

Fair-valueamortisation (22.6) – (22.6) –

Profit before taxation and distributions 35.6 24.9 10.7 43.0%Membershipdividend (6.7) – (6.7) –

Profit before taxation 28.9 24.9 4.0 16.1%

Totaloperatingresultwas£79.4mcomparedwith£41.7minthefirsthalfof2009.

Incomeandoperatingresultsshowgrowthof36.4%and90.4%respectively.The2010figuresincludetheBritanniabusinessforthehalfyear,with2009figuresreflectingtheheritageCFSbusiness(pre-merger)only.Inaddition,the2010halfyearcoversaperiodof26weeks,while2009figuresreflecta28-weekperiod.

Thegrowthinbothincomeandcostsreflectstheincreaseinscaleofthebusinesspostmerger,althoughitisnoteworthythatimpairmenthasfallenby41.1%in2010.Thisreflectsacombinationofimprovedarrearscollectionprocessesandtighteningofcredit-riskscorecardsintheunsecuredlendingbusiness,togetherwithcontinuedfocusoncreditqualitywithincorporatebanking.Thesefiguresrepresentafavourableresultinthecurrenteconomicclimate.

Onalike-for-likebasis(comparing26weeksofthefirsthalfof2009andincludingBritannia),theCo-operativeBankgeneratedgrowthinbothincome(1.9%)andoperatingresults (38.0%),reflectingarobustperformance.Bankingmarginshaveremainedbroadlyunchanged,with improvedmortgagemarginsoffsetbythehighercostsoftermdepositfunding.

Like-for-likecostswere1.6%lowerthan2009,reflectingrigorouscostmanagementacrossthebusinessandcostreductionsthroughmergersynergybenefitsoffsettinginflationarypressures.Impairmentchargesonalike-for-likebasis(evenbeforefair-valuecreditprotection)were7.7%lowerthan2009.

Profitbefore tax, distributionsand fair-valueamortisation includes£18.3mof significant costswhichhavebeen incurredonamajorprogrammeofinvestmentandintegrationandcompareswith£14.6mfor2009.Acostof£3.3mhasbeenattributedtotheFinancialServicesCompensationScheme,£1.1mhigherthanin2009.

Totalbalancesheetassetsof£45.7bnwere£0.4bnlowerthanthepositionat31December2009.Customerlendingbalanceshaveincreased,reflectingCFS’scontinuedsupporttofamiliesandsmallbusinessesduringthesedifficulttimes,advancing£1.1bntomortgagecustomersand£0.4bntobusinesses.Theincreaseincustomerdepositsof£1.4bn(4.2%)hasenabledCFStoreduceitsdependencyonfundingfromthewholesalemarkets.Inaddition,theissuanceofa£2.5bnsecuritisationinearly2010hasprovidedanadditionalsourceofterm-funding.

Our businessesCFSconsistsoftwomainsegments–Retail and Corporate and Markets.

The Retail business offers a range of financial products and services to individuals, households and small businesses throughout the UK, trading as The Co-operative Bank, Britannia and smile.

CorporateandMarkets(CAM)isthebusiness-to-businesspartofCFSandincludescorporatebanking,Platform,Optimum,treasuryandbusinessservices.

OtherincludestheresultsofUnityTrustBankandcentralcosts.



Operating result by business segment


Retail – 0.7 (0.7) -100.0%CAM 80.4 37.3 43.1 115.5%Other (1.0) 3.7 (4.7) -127.0%


Retail

Operating result


Net interest income 167.3 120.1 47.2 39.3%Non-interest income 77.2 70.4 6.8 9.7%

Net income 244.5 190.5 54.0 28.3%

Operatingcosts–steadystate (201.3) (136.0) (65.3) -48.0%Operatingcosts–strategicinitiatives (12.2) (4.6) (7.6) -165.2%Impairment losses (31.0) (49.2) 18.2 37.0%

Operating result – 0.7 (0.7) -100%

TotalRetailoperatingresultreflectedabreakevenpositionindifficultmarkets,only£0.7mlowerthan2009despitethelowinterest-rateenvironmentandtheconsequentshiftincustomerbehaviour,whichhasbeenreflectedinlowercurrentaccountcommissionsandlowercreditcardspendandbalances.This,however,includestheincreasedcostsofprojectexpenditurewhichareexpectedtogeneratefuturebenefits;excludingthesecosts,operatingprofitwas£6.9mhigherthan2009.

TheimprovementinnetinterestincomelargelyreflectstheinclusionofBritannia.Onalike-for-likebasis,netinterestincomehasfallenreflectingchangesintheinterest-rateenvironmentandtheimpactoffloorsonsavingsbalances.Mortgagebalancesremainstrong,withJune2010applicationssurpassingtherecordforeitherheritagebusinessinasinglemonth.Averageloantovalueratiosremainbelow50%acrosstheretailbusiness.

Mortgagemarginshaveimproved,butthishasbeenoffsetbythecostofmaintaininghigher,mainlyterm,liabilitybalancestoensureastrongliquiditypositionandbyadeclineincreditcardbalancesandyieldsreflectingthechangeincustomerbehaviourduetotherecession.

Non-interest income has improved due to the inclusion of Britannia, partially offset by lower income from the independent financial advisor subsidiary, reflectingdifficultmarketconditionsandlowermerchantinterchangefeesascustomers’creditcardspenddeclines.

Impairment losses have significantly improved compared with 2009 reflecting improved arrears collection processes and a tightening of credit-risk scorecardsintheunsecuredbook.Mortgagequalityhasbeenmaintainedwithcontinuedlowratesofimpairment.

Thestrengthoftheretailcustomerpropositionhasonceagainbeenrecognisedbyanumberofawards.CFSwasnameda‘recommendedprovider’byWhich?Magazine,andwonmultiplecategoriesattheMoneywiseCustomerServiceawards.TheCo-operativeBankreceivedthehighestratingfromtheForresterUKbankwebsitebenchmarkingsurvey(beatingNatWest,Santander,Barclays,LloydsTSBandHalifax).




Corporate and Markets (CAM)

Operating result


Net interest income 135.6 75.0 60.6 80.8%Non-interest income 17.4 22.5 (5.1) -22.7%

Net income 153.0 97.5 55.5 56.9%

Operatingcosts–steadystate (59.2) (35.9) (23.3) -64.9%Operatingcosts–strategicinitiatives (3.0) (0.8) (2.2) -275.0%Impairment losses (10.4) (23.5) 13.1 55.7%


CAMbusinessprofitability hasmore thandoubled to£80.4m,an increaseof£43.1mcomparedwith2009,drivenbya significant improvement inunderlyingperformanceandthemergerwithBritannia.During2010,CAMcontinueditsfocusonabalancedapproachtolendinganddepositgrowthresultingin£0.7bnofnewcustomerlendinganda£0.8bnincreaseincustomerdeposits.

Corporate bankingThecontinuedfocusoncreditqualityhasresultedinlowerimpairmentcharges.Theeconomicrecoveryremainsfragileandcorporatecolleaguescontinuetosupportcustomerswhereverpossibleindifficulttimes.Corporatebankinghasbeensuccessfulincontrollingitscostbasewhilstgrowingthebusiness.Thesebenefitshavebeenpartiallyoffsetbyslightlyreducedlike-for-likenetincomeintheperiod,reflectingthehighercostoftermfunding.Theresultsalsoreflectcontinuedrobustlendingmarginsandsignificantcustomerdepositsgrowthintheperiod.

Optimum and PlatformIntheperiodsincemerger,thePlatformintermediarybusinesshasdemonstratedsuccessasaprimeandselectivespecialistlender.ControlledgrowthhasallowedPlatformtowritegoodqualityprimebusinessandbeselectivewithprudentloan-to-valuecriteria.

Duringthefirsthalfof2010,overallarrearsintheOptimumportfolio(aclosedbookofpre-mergerintermediaryandacquiredloanbookassets)havecontinuedtoimprove.Thenumberofnewarrearscaseshasfallenasthebusinessexperiencessuccesswithcontinuinginvestmentandfocusonexistingcases.Thisenablescustomerstorepairtheirarrearspositionandcreditrecord.

TreasuryTreasuryhassuccessfullymaintainedhighlevelsofliquidityfromdiversifiedfundingsources.Like-for-liketreasuryperformanceisbroadlyinlinewith2009.Higherterm-fundingcostsfornewdebtissueshavebeenoffsetbyactivemanagementofthecostsofthebackbookofsecuredfunding.Treasurywassuccessfulinissuinga£2.5bnsecuritisationinearly2010providinganadditionalsourceofterm-fundingforthebusinessasawhole.

Business servicesBusinessserviceswasformedon1January2010,bringingtogethertheprovisionoffeeincomegeneratingservicessuchasagencybanking,businessVisaandpurchasingcardprocessingschemes,third-partymortgageprocessingandoverseaspayments. In the first half of 2010 it has grown the customer base for Visa/government purchasing card schemes and established a major new third-party mortgage master-servicingcontract.

Summary and outlookDespitethecontinuingpressuresontheUKeconomyandfinancialservicesindustry,theCo-operativeBankhasdeliveredastronghalf-yearperformance.Profitshavestrengthenedacrossthebusiness,supportedbyastrongbrandandabusinessmodelwhichreflectscomplementarybusinessdivisions.Operatingresultsareup90%to£79.4m.

Our reputation for prudence and financial stability is strongly underpinned by a capital position that sets the platform for future growth without compromising customerinterests.Like-for-likecostshavereducedyearonyearandimpairmentissignificantlyimproved.StrongliquidityandcapitalreservesmeanthattheCo-operativeBankisinapositiontopursueastrategyofgrowthandinvestmentoverthecomingyears.

TheCo-operativeBankisnowwellonwithitsbusinessintegrationprogramme,whichwillberolledoutoverthenextthreeyearsandwilldelivertheinfrastructuretotakeanincreasinglyproactiveroleintomorrow’smarkets.AstheUK’smostdiversifiedmutualfinancialserviceprovidertheCo-operativeBankwillcontinuetointegratetherangeofcustomeraccesspointsinordertoofferasingle,seamlesscustomerproposition.AsUKconsumersincreasinglyquestionthefinancialservices‘statusquo’,ourmember-owned,customer-ledandethically-guidedbusinessmodeliswellplacedtoestablishitselfastheUK’smostadmiredfinancialservicesprovider.


TheDisclosureandTransparencyRules(DTR4.2.7)requirethatadescriptionoftheprincipalrisksanduncertaintiesaregivenintheinterimfinancialreportinrespectoftheremainingsixmonthsofthefinancialyear.TheserisksareconsistentwiththosedescribedintheBank’sriskmanagementsectionofthe2009financialstatementsonpages53to88.TheprincipalrisksthattheBankfacesforthesecondhalfof2010are:

Credit riskCreditriskisthecurrentorprospectiverisktoearningsandcapitalarisingfromanobligor’sfailuretomeetthetermsofanycontractwiththeBankoritsfailuretoperformasagreed.

TheBank’screditriskmanagementpoliciesareapprovedbytheriskmanagementcommittee(RMC)(delegatedauthorityfromtheBoard)annuallyandaretheresponsibilityofthebankingriskofficer.Thepoliciesdeterminethecriteriaforthemanagementofretail,corporateandwholesalerisk,includingsecuritisation,marketexposuresandcreditmanagementstandards,includingcountry,sectorandcounterpartylimits,alongwithriskappetitesanddelegatedauthorities.

AllauthoritytotakecreditriskderivesfromtheBoard.Thisisdelegatedtoindividualsviathechiefexecutive.Thelevelofcreditriskauthoritydelegateddependsonseniorityandexperience,varyingaccordingtothequalityofthecounterpartyoranyassociatedsecurityorcollateralheld.

TheBank’spersonallendingpolicyistoestablishcreditcriteriawhichdeterminethebalancebetweenvolumegrowth(generatinghigherincome)andhigherbaddebts,soastooptimiseoverallprofitabilityrelativetotheBoard’sriskappetiteandtheBank’sco-operativevaluesandprinciples.Thequalityoftheoverallportfolioandindividualcustomersaremonitoredusingriskratingsystemsandscorecardscalibratedtoriskofdefaultandexpectedloss,andtheBoardreceivesanupdateonbaddebtmonthly.TheRMCreceivesregulardetailedreportsontheperformanceoftheportfolio.

TheBank’scorporatesectorpolicyistomaintainabroadsectoralspreadofexposureswhichreflecttheBank’sareasofexpertise.Creditexposurestocorporate andbusiness banking customers are assessed individually.Thequality of the overall portfolio ismonitoredusing a credit grading systemcalibratedtoexpectedloss.Allaspectsofcreditmanagementarecontrolledcentrally.TheRMCreceivesregulardetailedreportsontheperformanceoftheportfolio.Theexposurescommitteereceivesregularreportsonnewfacilities,baddebtprovisionsandthemanagementofproblemloans.TheBoardreceivesanupdateonportfolioperformanceandbaddebtmonthly.

TheBank’swholesale-marketcredit-riskframeworktakesanholisticapproachtoriskmanagementwith,atitscentre,acredit-riskpolicywhichgovernsthetypesofexposurethebusinesscantakeandsetsconcentrationparameters.Tocomplementthis,individualauthorityisdelegatedintermsofinternalratinggrade(IRG)andassociatedprobabilityofdefault(PD)toapprovelimitstoindividualcounterpartieswithintheparametersestablishedbythecreditriskpolicy.TheRMCreceivesregulardetailedreportsontheperformanceoftheportfolio.Theexposurescommitteereceivesregularreportsonchangesinexposurelimits,watchlistandproblemcounterpartyinformation.TheBoardreceivesanupdateonportfolioperformanceandbaddebtmonthly.

Cashandbalancesatcentralbanksareconsideredtoberisk-freeandhavebeenexcludedfromthefollowinganalysisofcreditexposure.

Gross Credit Credit-risk Notes balance commitments exposure30 June 2010Loans and receivables

Loans and advances to banks 2,318.8 71.7 2,390.5Loans and advances to customers 5 34,272.9 5,095.8 39,368.7Investmentsecurities 6 2,197.8 – 2,197.8

Available-for-salefinancialassetsInvestmentsecurities 6 3,953.7 – 3,953.7

Derivativefinancialinstruments 953.9 – 953.9

43,697.1 5,167.5 48,864.6

Allowanceforimpairmentonloansandadvances (203.1)Impairment losses on investments (87.7)

Total 48,573.8

Principal risksAllamountsarestatedin£munlessotherwiseindicated



Credit risk (continued) Notes Gross Credit Credit-risk balance commitments exposure 31 December 2009Loans and receivablesLoansandadvancestobanks 1,781.5 113.8 1,895.3Loansandadvancestocustomers 5 34,267.7 5,021.3 39,289.0Investmentsecurities 6 2,500.7 – 2,500.7

Available-for-salefinancialassetsInvestmentsecurities 6 4,529.2 – 4,529.2

Derivativefinancialinstruments 1,023.0 – 1,023.0

44,102.1 5,135.1 49,237.2

Allowanceforimpairmentonloansandadvances (194.0)Impairmentlossesoninvestments (86.4)

Total 48,956.8

Notes5and6providefurtheranalysisonconcentrationsofcreditrisk.

Thefollowingtableanalysestheaboveexposuresbyimpairmentclassificationandeitherarrearsorriskbandingasappropriate.

Investment Investment Loans and Loans and securities securities Derivative30 June 2010 advances to advances to loans and available- financial banks customers receivables for-sale instruments TotalIndividually impaired90 days past due or evidence of impairment – 1,966.5 25.0 73.2 – 2,064.7 Impairment recognised – (55.8) (8.5) (73.2) – (137.5)

– 1,910.7 16.5 – – 1,927.2Collectively impairedLess than 90 days past due – 228.3 110.0 – – 338.390-179 days past due – 21.4 – – – 21.4180 days plus past due 4.6 143.2 – – – 147.8Impairment recognised – (147.3) (6.0) – – (153.3)

4.6 245.6 104.0 – – 354.2Past due but not impaired0-29 days past due – 314.8 – – – 314.830-59 days past due – 111.7 – – – 111.760-89dayspastdue – 92.0 – – – 92.0

– 518.5 – – – 518.5Neither past due nor impairedLow to medium risk 2,385.9 29,031.4 2,062.8 3,880.5 953.9 38,314.5Mediumtohighrisk – 7,459.4 – – – 7,459.4

2,385.9 36,490.8 2,062.8 3,880.5 953.9 45,773.9

Total 2,390.5 39,165.6 2,183.3 3,880.5 953.9 48,573.8



Credit risk (continued) Investment Investment Loans and Loans and securities securities Derivative31 December 2009 advances to advances to loans and available- financial banks customers receivables for-sale instruments TotalIndividually impaired90dayspastdueorevidenceofimpairment – 2,100.3 25.0 71.9 – 2,197.2Impairmentrecognised – (53.6) (8.5) (71.9) – (134.0)

– 2,046.7 16.5 – – 2,063.2Collectively impairedLessthan90dayspastdue – 212.1 124.3 – – 336.490-179dayspastdue – 22.6 – – – 22.6180dayspluspastdue 4.6 143.0 – – – 147.6Impairmentrecognised – (140.4) (6.0) – – (146.4)

4.6 237.3 118.3 – – 360.2Past due but not impaired0-29dayspastdue – 281.0 – – – 281.030-59dayspastdue – 125.0 – – – 125.060-89dayspastdue – 52.1 – – – 52.1

– 458.1 – – – 458.1Neither past due nor impairedLowtomediumrisk 1,890.7 28,723.1 2,351.4 4,457.3 1,023.0 38,445.5Mediumtohighrisk – 7,629.8 – – – 7,629.8

1,890.7 36,352.9 2,351.4 4,457.3 1,023.0 46,075.3

Total 1,895.3 39,095.0 2,486.2 4,457.3 1,023.0 48,956.8

Analysis of impaired assets and associated collateral

Impaired assetsLoans and securities are considered impaired where it is determined that the Bank will be unable to collect all principal and interest outstanding, according tothecontractualtermsoftheagreements.

Theloanportfoliosarereviewedonacontinuousbasistoassessimpairment.Indeterminingwhetherabad-debtprovisionshouldberecorded,judgmentsare made as to whether there is objective evidence that a financial asset or portfolio of financial assets is impaired as a result of loss events that occurred afterrecognitionoftheassetandpriortothebalance-sheetdate.

Corporateloansandretailmortgagelendingwithevidenceofimpairmentincluding90dayspastdueareindividuallyassessedforimpairment.Collectively-impairedassetsincludeunsecuredretaillendingbalances.Provisionsareappliedtocredit-cardbalancesat30dayspastdueandat45dayspastdueonallotherunsecuredretail-lendingbalances.

Atthebalancesheetdate,theBankassessesitsdebtsecuritiesforobjectiveevidencethatanimpairmentlosseventhasoccurred.Foradebtsecuritythismaybethedisappearanceofanactivemarket.Foravailable-for-saledebtsecuritiesparticularconsiderationisgiventoevidenceofanysignificantfinancialdifficultyoftheissuerormeasurabledecreaseintheestimatedcashflowsfromtheinvestments.

Duringthefirsthalfof2010,194customerloanswithabalanceof£21.7m(duringthewholeof2009:534loanswithabalanceof£95.2m)intheBankwere renegotiated.These loansareclassifiedas loansneitherpastduenor impaired, forso longas themortgageescomplywith the termsof theirrenegotiatedcontracts.

Past due but not impairedLoans and securities are considered past due but not impaired when the contractual interest or principal payment are in arrears, but the Bank believes thatimpairmentisnotappropriateasatriggerpointforimpairmenthasnotbeenreached.

Includedwithinpastduebutnotimpairedarecredit-cardexposuresoflessthan30daysand45daysforotherretailunsecuredlending.Formortgages,accountsupto90daysinarrearsbutwithnoprovisionareclassedaspastduebutnotimpaired.



Credit risk (continued)

Neither past due nor impairedWithinthecredit-exposureanalysistableabovelowtomediumriskhasbeendefinedasexposureswherethePDis1%orbelowoveraone-yeartimehorizonforexposuresonaninternal-ratings-based(IRB)approachunderBaselIIandslottingcategorystrong/good/satisfactoryforspecialisedlendingexposuresundertheslottingapproach.MediumtohighriskhasbeendefinedasaPDofgreaterthan1%overaone-yeartimehorizonforexposureonanIRBapproachunderBaselIIandslottingcategoryweakforspecialisedlendingexposuresundertheslottingapproach.

Withinthetreasurydebt-securityportfolio83%(2009:82%)ofexposureshaveanexternalcreditratingequivalenttoFitchAorabove.

The factors considered in determining if financial assets are individually impaired are stated above and in the critical judgments and estimates section of theBank’s2009financialstatementsonpages90to92.

Fair-value adjustments and provisions held against impaired exposuresWhenBritanniaBuildingSocietymergedwithTheCo-operativeBank,theheritage-Britannialendingportfolioswerecarriedintothenewlymergedentityattheirfairvalue,takingaccountoffuturelifetimeexpectedlossonthelendingportfoliosat1August2009.Thelifetime-expected-lossadjustmentisoffsetagainsttheheritage-Britanniagrosslendingbalancesinthecombinedentity’saccounts.

Market riskMarket riskarises from theeffectof changes inmarketpricesoffinancial instruments,on incomederived from thestructureof thebalancesheet,executionofcustomerandinter-bankbusinessandproprietarytrading.Themajorityoftheriskarisesfromchangesininterestrates.

TheBoardreceivesreportsonthemanagementofbalance-sheetriskand,eachmonth,theCFSassetandliabilitycommittee(ALCO)reviewsthebalance-sheetriskpositionandtheutilisationofwholesale-marketrisklimits.

MarketriskiscontrolledwithinstrictlimitswhichareapprovedbytheBoard.Thelevelsoftheserisklimitshavebeenreviewedandremainappropriate.TherisklimitsreflectthelowrisknatureofthemarketriskactivitywhichisundertakenbytheBank.

Thetablebelowillustratesthesensitivityanalysisrelatingtothe‘core’Bank,aprimarymeasureintheapproachtomanaginginterest-raterisk.Itshowstheestimatedchangeinnetincomeovertheperiodresultingfroma1%shockininterestratesatthebeginningoftheperiod(subjecttoa0%floor).Theresultsaredrivenbyproductandpricingmix,andexcludewholesaletreasuryandcustomercurrencybalanceswhicharemanagedwithinthetreasuryriskframework.

Change in net interest income for 2010 based on 100bp shock in interest rates at the beginning of the year (£m)

100bp 100bp increase decrease2010 At30June2010 14.6 (12.5)Averagefortheperiod (1.0) 4.5 Maximumfortheperiod 14.6 16.0 Minimumfortheperiod (11.7) (12.5)

2009Attheyearend (0.2) 1.9Averagefortheperiod (4.4) 5.7Maximumfortheperiod 3.4 25.6Minimumfortheperiod (23.3) (3.7)

Currency riskTheBank’streasuryforeignexchangeactivitiesareprimarily:

• providingaserviceinmeetingtheforeign-exchangerequirementsofcustomers;and• maintainingliquidityineurosandUSdollarsbyraisingfundsandinvestingthesetogenerateareturn;and• performinglimitedintra-daytradingandovernightpositioninginmajorcurrenciestogenerateincrementalincome.



Currency risk (continued)ThetablebelowprovidesananalysisoftheBank’sassetsandliabilitiesbycurrency.Allnumbersarestatedinsterlingequivalents.

£ $ € Other Total £ $ € Other Total 2010 2009AssetsCash and balances at central banks 1,591.7 – – – 1,591.7 1,706.8 – – – 1,706.8Loans and advances to banks 2,067.1 11.4 221.7 18.6 2,318.8 1,377.9 101.5 293.8 8.3 1,781.5Loans and advances to customers 33,755.9 77.4 221.1 15.4 34,069.8 33,724.9 72.2 261.0 15.634,073.7Fair-valueadjustmentsforhedgedrisk 212.4 – – – 212.4 66.1 – – – 66.1

Investmentsecurities–loansand receivables 1,659.4 87.2 380.1 56.6 2,183.3 1,862.7 137.3 426.6 59.6 2,486.2Investmentsecurities–available-for-sale 2,467.2 519.0 585.5 308.8 3,880.5 2,441.0 613.3 1,042.4 360.6 4,457.3Derivativefinancialinstruments 953.3 0.1 0.5 – 953.9 1,022.7 – 0.3 – 1,023.0Equity shares 7.2 – – – 7.2 7.2 – – – 7.2Investments in joint ventures 2.2 – – – 2.2 1.8 – – – 1.8Goodwill 0.6 – – – 0.6 0.6 – – – 0.6Intangiblefixedassets 39.9 – – – 39.9 46.1 – – – 46.1Investment properties 154.9 – – – 154.9 137.7 – – – 137.7Property, plant and equipment 106.5 – – – 106.5 121.5 – – – 121.5AmountsowedbyotherCo-operativeGroupundertakings 18.6 – – – 18.6 91.0 – – – 91.0Other assets 71.3 0.4 1.2 0.1 73.0 51.0 0.3 0.8 0.1 52.2Deferredtaxassets 83.7 – – – 83.7 86.1 – – – 86.1

Total assets 43,191.9 695.5 1,410.1 399.5 45,697.042,745.1 924.6 2,024.9 444.246,138.8

£ $ € Other Total £ $ € Other Total 2010 2009LiabilitiesDepositsbybanks 1,767.5 452.0 788.7 131.5 3,139.7 4,056.5 488.0 1,397.5 140.4 6,082.4Customer accounts 32,019.3 16.9 29.8 1.5 32,067.530,755.6 22.4 46.3 3.930,828.2Customeraccounts–capitalbonds 1,789.6 – – – 1,789.6 1,647.1 – – – 1,647.1Debtsecuritiesinissue 4,155.0 – 239.0 – 4,394.0 3,201.0 123.8 9.5 – 3,334.3Derivativefinancialinstruments 727.8 1.5 7.6 – 736.9 580.3 4.2 6.8 – 591.3Other borrowed funds 976.1 – – – 976.1 946.5 – – – 946.5AmountsowedtootherCo-operativeGroupundertakings 330.9 – – – 330.9 329.2 – – – 329.2Other liabilities 118.8 0.4 1.4 – 120.6 220.2 0.9 0.8 – 221.9Accrualsanddeferredincome 128.5 – 0.1 – 128.6 158.0 – – – 158.0Provisions for liabilities and charges 58.4 – – – 58.4 52.8 – – – 52.8Currenttaxliabilities 51.2 – – – 51.2 71.0 – – – 71.0

Total liabilities 42,123.1 470.8 1,066.6 133.0 43,793.542,018.2 639.3 1,460.9 144.344,262.7

Net on-balance-sheet position 1,068.8 224.7 343.5 266.5 1,903.5 726.9 285.3 564.0 299.9 1,876.1

Liquidity riskLiquidityriskarisesfromthetimingofcashflowsgeneratedfromtheBank’sassets,liabilitiesandoff-balancesheetinstruments.TheBank’sliquidity-managementpoliciesarereviewedandapprovedannuallybytheRMCandcompliancereviewedmonthlybyALCO.

The Bank’s liquidity-management framework is designed in line with industry guidelines, including Institute of International Finance and Bank forInternationalSettlementsrecommendations,andisbeingdevelopedinresponsetoemergingFSArequirements.

TheBank’sliquidity-riskappetiteisachievedbyembeddingtheBank’sliquidityphilosophy,whichis:• theBankfundsbeforeitlends;• theBankfundscustomerassetswithcustomerdepositstoahighdegree,balancedwiththeuseoftermmoneyfromthewholesalemarkets;and• theBankholdsliquidassetsincaseofstress.



Liquidity risk (continued)

Theliquidity-riskphilosophyissupportedbystrategicliquidityratiosandstresstesting.Thestrategicratiosare:• wholesaleborrowingratio;• liquidassetsratio;• customerloan/depositratio;and• corefundingratio.

Thesearesupplementedbytacticalliquiditymeasureswhichcoverarangeofindicatorsincludingre-financerisk,concentrationriskandcreditratings.

Stresstestingisundertakenweeklyacrossarangeoffivestresstests.TheBoardhassetminimumsurvivaltimeperiodsforeachofthestresses.

Day-to-daycashflow(tacticalliquidity)ismanagedbytreasurywithinguidelineslaiddownbyALCOandinaccordancewiththestandardsestablishedforallbanksbybankingregulators.

TheBankhasahighproportionofretailassetsfundedbyretaildeposits,ensuringthereisnoover-relianceonwholesalefunding.ThereisatargetfundingratiosetinlinewiththeBoardapprovedstrategicplan,whichisbeingmet.TheBank’sstructuralliquidity-riskmanagementisthereforeretail-basedandisdependentonbehaviouralanalysisofbothcustomerdemandanddepositandloandrawdownprofilesbyproductcategorybasedonexperienceoverthelast10years.ThebehaviourofretailproductsisreviewedbyALCOonaquarterlybasis.InadditiontheBankhasmaturitymismatchlimitstocontroltheexposuretolonger-termmismatches.

Asaresultofthisstrength,theBankhasnotbeenrequiredtoenterthemarketsatdisadvantageoustermsinthehalfyear.Futureassetgrowthwillbeundertakenwithintheliquidity-riskappetitesetbytheBoard.

The following table analyses assets and liabilities into relevant maturity groupings based on the remaining period from the balance-sheet date to the contractualmaturitydate. 3 months or 1 year or Repayable less but not less but 5 years or on repayable over less but Over 5 Non-cash30 June 2010 demand on demand 3 months over 1 year years items Total

AssetsLoans and advances to banks 245.6 1,478.5 61.7 536.0 – (3.0) 2,318.8 Loans and advances to customers 1,149.9 2,674.6 1,743.6 6,594.4 23,028.1 (908.4) 34,282.2 Investmentsecurities–loansandreceivables – 103.8 724.9 1,155.2 473.6 (274.2) 2,183.3Investmentsecurities–available-for-sale – 1,226.0 737.9 1,089.9 826.7 – 3,880.5AmountsowedbyotherCo-operativeGroupundertakings 18.6 – – – – – 18.6 Other assets 2,545.5 – – – – 468.1 3,013.6

3,959.6 5,482.9 3,268.1 9,375.5 24,328.4 (717.5) 45,697.0

LiabilitiesDepositsbybanks 110.7 1,662.2 291.7 1,075.1 – – 3,139.7Customer accounts 20,652.7 4,555.4 4,516.0 2,248.8 94.6 – 32,067.5Customeraccounts–capitalbonds – 117.9 271.3 1,320.0 80.4 – 1,789.6Debtsecuritiesinissue – 881.0 824.8 1,023.9 2,596.7 (932.4) 4,394.0Other borrowed funds – 3.2 – 150.0 1,105.1 (282.2) 976.1Amountsowedtoother Co-operativeGroupundertakings 79.5 251.4 – – – – 330.9Other liabilities 736.9 82.0 8.9 9.0 – 258.9 1,095.7

21,579.8 7,553.1 5,912.7 5,826.8 3,876.8 (955.7) 43,793.5

Net liquidity gap – contractual basis (17,620.2) (2,070.2) (2,644.6) 3,548.7 20,451.6 238.2 1,903.5

Behavioural adjustments:Loans and advances to customers – (301.5) (600.1) (3,701.9) 4,603.5 – –Customer accounts 20,033.5 1,110.2 (807.0) (20,336.7) – – –

Net liquidity gap – behavioural basis 2,413.3 (1,261.5) (4,051.7) (20,489.9) 25,055.1 238.2 1,903.5



Liquidity risk (continued)

3 months or 1 year or Repayable less but not less but 5 years or on repayable over less but Over 5 Non-cash31 December 2009 demand on demand 3 months over 1 year years items Total

AssetsLoansandadvancestobanks 272.9 1,492.6 – 32.4 – (16.4) 1,781.5Loansandadvancestocustomers 1,024.6 2,667.2 1,584.6 7,048.6 22,553.0 (738.2) 34,139.8Investmentsecurities–loansandreceivables – 105.7 391.3 1,808.5 524.7 (344.0) 2,486.2Investmentsecurities–available-for-sale – 1,076.4 874.7 1,705.0 801.6 (0.4) 4,457.3Amountsowedbyother Co-operativeGroupundertakings 1.5 89.5 – – – – 91.0Otherassets 1,881.0 135.1 149.3 490.3 74.2 453.1 3,183.0

3,180.0 5,566.5 2,999.9 11,084.8 23,953.5 (645.9) 46,138.8LiabilitiesDepositsbybanks 420.8 4,421.1 701.3 537.9 1.3 – 6,082.4Customeraccounts 19,137.6 3,216.5 6,246.8 2,213.7 – 13.6 30,828.2Customeraccounts–capitalbonds – 57.5 356.7 1,173.6 59.3 – 1,647.1Debtsecuritiesinissue – 944.4 436.5 2,590.6 551.6 (1,188.8) 3,334.3Otherborrowedfunds – 7.6 – – 1,232.0 (293.1) 946.5AmountsowedtootherCo-operativeGroupundertakings 58.2 271.0 – – – – 329.2Otherliabilities 95.8 17.8 62.7 345.9 99.0 473.8 1,095.0

19,712.4 8,935.9 7,804.0 6,861.7 1,943.2 (994.5) 44,262.7

Net liquidity gap – contractual basis (16,532.4) (3,369.4) (4,804.1) 4,223.1 22,010.3 348.6 1,876.1

Behavioural adjustments:Loansandadvancestocustomers – (235.3) (598.9) (2,137.8) 2,972.0 – –Customeraccounts 17,556.9 (44.3) 2,328.8 (19,841.4) – – –

Net liquidity gap – behavioural basis 1,024.5 (3,649.0) (3,074.2) (17,756.1) 24,982.3 348.6 1,876.1

Fair values of financial assets and liabilities

The table below sets out a summary of the carrying and fair values of those financial assets and liabilities not presented on the Bank balance sheet at fair value,unlessthereisnosignificantdifferencebetweencarryingandfairvalues.

Category Class Carrying value Fair value(as defined by IAS 39) (as determined by the Bank) (including fair-value adjustments for hedged risk)30 June 2010Financial assets

Loans and receivables Loans and advances to banks 2,318.8 2,319.1 Loans and advances to customers 34,282.2 34,974.9 Investment securities 2,183.3 2,295.3

Financial liabilities

Financialliabilitiesatamortisedcost Depositsbybanks 3,139.7 3,141.4 Customer accounts 32,067.5 32,238.8 Debtsecuritiesinissue 4,394.0 4,181.2 Other borrowed funds 976.1 923.2



Fair values of financial assets and liabilities (continued)

Category Class Carrying value Fair value(as defined by IAS 39) (as determined by the Bank) (including fair-value adjustments for hedged risk)31 December 2009Financial assets

Loans and receivables Loansandadvancestobanks 1,781.5 1,780.5 Loansandadvancestocustomers 34,139.8 34,758.0 Investmentsecurities 2,486.2 2,489.4

Financial liabilities

Financialliabilitiesatamortisedcost Depositsbybanks 6,082.4 6,084.7 Customeraccounts 30,828.2 30,919.6 Debtsecuritiesinissue 3,334.3 2,475.2 Otherborrowedfunds 946.5 787.0

Key considerations in the calculation of fair values are as follows:

(a) Loans and advances to banks/deposits by banksLoansandadvancestobanksincludeinter-bankplacementsanditemsinthecourseofcollection.

Thefairvalueoffloating-rateplacementsandovernightdepositsistheircarryingamount.Theestimatedfairvalueoffixed-interest-bearingdepositsisbasedondiscountedcashflowsusingprevailingmoney-market interest rates fordebtswithsimilarcredit riskand remainingmaturity.Acredit-lossadjustmenthasbeenappliedbasedonexpectedlossamountsderivedfromtheBank’sregulatorycapitalcalculations.

(b) Loans and advances to customersFixed-rateloansandadvancestocustomersarerevaluedtofairvaluebasedonfutureinterestcashflows(atfundingrates)andprincipalcashflowsdiscountedusingthezero-couponrate.Forecastprincipalrepaymentsarebasedonredemptionattheearlierofmaturityorrepricingdatewithsomeoverlayforhistoricbehaviouralexperiencewhererelevant.Theeventualtimingoffuturecashflowsmaybedifferentfromtheforecastduetounpredictablecustomerbehaviour.Itisassumedthereisnofair-valueadjustmentrequiredinrespectofinterest-ratemovementonvariable-rateassets.Acredit-lossadjustmenthasbeenappliedbasedonexpectedlossamountsderivedfromtheBank’sregulatorycapitalcalculations.

(c) Customer accountsTheestimated fairvalueofdepositswithnostatedmaturity,which includesnon-interestbearingdeposits, is theamount repayableondemand.Theestimatedfairvalueoffixedinterest-bearingdepositsandotherborrowingswithoutquotedmarketpriceisbasedondiscountedcashflowsusinginterestratesfornewdebtswithsimilarremainingmaturity.

(d) Customer accounts – capital bondsTheestimatedfairvalueofcustomeraccounts–capitalbondsisbasedonindependentthird-partyvaluationsusingforecastfuturemovementsintheappropriateindices.

(e) Debt securities in issue and other borrowed fundsTheaggregatefairvaluesarecalculatedbasedonquotedmarketprices.Forthosenoteswherequotedmarketpricesarenotavailable,adiscountedcashflowmodelisusedbasedonacurrentyieldcurveappropriatefortheremainingtermtomaturity.

(f) Investment securitiesFairvalueisbasedonmarketprices.Wherethisinformationisnotavailable,fairvaluehasbeenestimatedusingquotedmarketpricesforsecuritieswithsimilarcredit,maturityandyieldcharacteristics.

Additionally,derivativesaremeasuredatfairvalue.


Fair values of financial assets and liabilities (continued)

(g) DerivativesFuturesandoptionsaremarkedtomarketusinglistedmarketprices.Forinterest-rateswaps,theestimatedfairvalueisbasedondiscountedcashflowsusingprevailingmoney-marketinterestratesforinstrumentswithsimilarremainingmaturity.

Operational and other risksTheBanksetoutdetailsoftheotherrisksanduncertaintiesthatcouldimpactitsperformanceinits2009financialstatements.Theseremainunchangedatthereportingdate.


Capital managementAllamountsarestatedin£munlessotherwiseindicated

Capital resourcesTheBank’spolicyistomaintainastrongbasesoastomaintaininvestor,creditorandmarketconfidenceandtosustainfuturedevelopmentofthebusiness.However, the Bank still recognises the need to maintain a balance between the potential higher returns that might be achieved with greater gearing, and theadvantagesandsecurityaffordedbyasoundcapitalposition.

OursubmissionstotheFSAintheperiodhaveshownthattheBankanditsindividually-regulatedoperationshavecompliedwithallexternally-imposedcapitalrequirementsthroughouttheperiod.

TherehavebeennomaterialchangesintheBank’smanagementofcapitalduringtheperiod.

30 June 31 December 2010 2009Core tier one capitalPermanent share capital 230.0 230.0Retained earnings 1,562.8 1,454.2Minorityinterest 31.6 29.5Interim profits – 15.9Sharepremiumaccount 8.8 8.8

Total core tier one capital 1,833.2 1,738.4Perpetual non-cumulative preference shares 60.0 60.0

Total tier one capital before regulatory deductions 1,893.2 1,798.4

Tier two capitalRevaluation reserves 2.9 2.9Long term subordinated debt 876.6 870.5

Total tier two capital before deductions 879.5 873.4

TheBank’sregulatorycapitalisanalysedintotwotiers:

Tier one capitalTieronecapitalincludessharecapital,retainedearnings,andperpetualnon-cumulativepreferenceshares.Thepreferencesharescarrytherighttofixednon-cumulativepreferentialdividendatarateof9.25%,payable31Mayand30November.Retainedearningsexcludegainsorlossesoncashflowhedgesandavailable-for-saleassets.

Tier two capitalRevaluationreservesrelatingtonetgainsonequityheldintheavailable-for-salefinancialassetscategoryareincludedintiertwocapital.

Thetiertwocapitalincludessixsubordinated-debtissues.TherightsofpaymenttotheholdersofthisdebtaresubordinatedtotheclaimsofdepositorsandothercreditorsoftheBank.Moreinformationonthesecanbefoundinthe2009financialstatements.

ThecapitalratiosreportedinthebusinessandfinancialreviewarebasedonthePillarIcapitalrequirement.

Capital allocationThe allocation of capital between specific operations and activities is driven by optimisation of the return achieved on the capital allocated, and is based upontheregulatorycapital.Capitalallocationisundertakenindependentlyofthoseresponsibleforcapitalmanagement,andisreviewedbyALCO.EachnewproductmustearnatleasttheBank’sminimumtargetreturnonequity.



Independent review reportFortheperiodended30June2010

IntroductionWehavebeenengagedbythecompanytoreviewthecondensedsetoffinancialstatementsintheinterimfinancialreportforthesixmonthsended30June 2010 which comprises the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet,consolidatedstatementofcashflows,consolidatedstatementofchangesinequityandtherelatedexplanatorynotes.Wehavereadtheotherinformationcontained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information inthecondensedsetoffinancialstatements.

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DisclosureandTransparencyRules(“theDTR”)oftheUK’sFinancialServicesAuthority(“theUKFSA”).Ourreviewhasbeenundertakensothatwemightstatetothecompanythosematterswearerequiredtostatetoitinthisreportandfornootherpurpose.Tothefullestextentpermittedbylaw,wedonotacceptorassumeresponsibilitytoanyoneotherthanthecompanyforourreviewwork,forthisreport,orfortheconclusionswehavereached.

Directors’ responsibilitiesTheinterimfinancialreportistheresponsibilityof,andhasbeenapprovedby,thedirectors.ThedirectorsareresponsibleforpreparingtheinterimfinancialreportinaccordancewiththeDTRoftheUKFSA.

AsdisclosedinthebasisofpreparationtheannualfinancialstatementsofthegrouparepreparedinaccordancewithIFRSsasadoptedbytheEU.ThecondensedsetoffinancialstatementsincludedinthisinterimfinancialreporthasbeenpreparedinaccordancewithIAS34Interim Financial Reporting as adoptedbytheEU.

Our responsibilityOurresponsibilityistoexpresstothecompanyaconclusiononthecondensedsetoffinancialstatementsintheinterimfinancialreportbasedonourreview.

Scope of reviewWeconductedourreviewinaccordancewithInternationalStandardonReviewEngagements(UKandIreland)2410Review of Interim Financial Information Performed by the Independent Auditor of the Entity issuedbytheAuditingPracticesBoardforuseintheUK.Areviewofinterimfinancial informationconsistsofmakingenquiries,primarilyofpersonsresponsibleforfinancialandaccountingmatters,andapplyinganalyticalandotherreviewprocedures.AreviewissubstantiallylessinscopethananauditconductedinaccordancewithInternationalStandardsonAuditing(UKandIreland)andconsequentlydoesnotenableustoobtainassurancethatwewouldbecomeawareofallsignificantmattersthatmightbeidentifiedinanaudit.Accordingly,wedonotexpressanauditopinion.

ConclusionBased on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial reportforthesixmonthsended30June2010isnotprepared,inallmaterialrespects,inaccordancewithIAS34asadoptedbytheEUandtheDTRoftheUKFSA.

Andrew Walkerfor and on behalf of KPMG Audit PlcCharteredAccountantsStJames’SquareManchesterM26DS

25August2010

Consolidated income statementFortheperiodended30June2010(unaudited)

Allamountsarestatedin£munlessotherwiseindicated

Period to 30 June 2010 Period to 25 July 2009

Before After Before After significant Significant significant significant Significant significant items items items items items items Notes Interest receivable and similar income 863.2 – 863.2 298.3 – 298.3Interestexpenseandsimilarcharges (570.9) – (570.9) (96.1) – (96.1)

Net interest income 2 292.3 – 292.3 202.2 – 202.2

Feeandcommissionincome 121.7 – 121.7 111.7 – 111.7Feeandcommissionexpense (28.6) – (28.6) (22.2) – (22.2)

Net fee and commission income 3 93.1 – 93.1 89.5 – 89.5

Net trading income 2.1 – 2.1 3.5 – 3.5Other operating income 0.2 – 0.2 0.5 – 0.5

Operating income 387.7 – 387.7 295.7 – 295.7

Operatingexpenses 4 (287.9) (18.3) (306.2) (181.0) (14.6) (195.6)Financialservicescompensationschemelevies (3.3) – (3.3) (2.2) – (2.2)Impairment losses on loans and advances (43.0) – (43.0) (73.0) – (73.0)

Operating profit 53.5 (18.3) 35.2 39.5 (14.6) 24.9

Shareofpost-taxprofitsfromjointventures 0.4 – 0.4 – – –

Profit before taxation and profit-based payments 53.9 (18.3) 35.6 39.5 (14.6) 24.9

Profit-based payments to members of TheCo-operativeGroup (6.7) – (6.7) – – –

Profit before taxation 47.2 (18.3) 28.9 39.5 (14.6) 24.9

Incometax (17.1) 5.0 (12.1) (12.3) 4.1 (8.2)

Profit for the period 30.1 (13.3) 16.8 27.2 (10.5) 16.7

Attributableto:Equity shareholders 30.1 (13.3) 16.8 25.2 (10.5) 14.7Minorityinterests – – – 2.0 – 2.0

30.1 (13.3) 16.8 27.2 (10.5) 16.7

Earnings per share 0.66p (0.29)p 0.37p 0.76p (0.32)p 0.44p

Thesignificantitemsrelatetonon-recurringrestructuringcosts.



Consolidated statement of comprehensive incomeFortheperiodended30June2010(unaudited)Allamountsarestatedin£munlessotherwiseindicated

Period to Period to 30 June 2010 25 July 2009

Profitfortheperiod–equityshareholders 16.8 14.7Profitfortheperiod–minorityinterests – 2.0

Profit for the period 16.8 16.7

Other comprehensive income:Changes in cashflow hedges

Net changes in fair value recognised directly in equity 35.6 (21.8)Incometax (9.9) 6.1

Changes in available-for-sale assetsNet changes in fair value recognised directly in equity (19.8) 6.8Incometax 5.5 (1.9)Transfer to other operating income on disposal of equity shares – (0.7)Incometax – 0.2

Othercomprehensiveincomefortheperiod,netofincometax 11.4 (11.3)

Total comprehensive income for the period 28.2 5.4

Attributableto:Equity shareholders 28.2 4.3Minorityinterests – 1.1

Total comprehensive income for the period 28.2 5.4

Consolidated balance sheetAt30June2010(unaudited)


30 June 31 December Notes 2010 2009 restatedAssetsCash and balances at central banks 1,591.7 1,706.8Loans and advances to banks 2,318.8 1,781.5Loans and advances to customers 5 34,069.8 34,073.7Fair-valueadjustmentsforhedgedrisk 212.4 66.1

Investmentsecurities–loansandreceivables 6 2,183.3 2,486.2Investmentsecurities–available-for-sale 6 3,880.5 4,457.3Derivativefinancialinstruments 953.9 1,023.0Equity shares 7.2 7.2Investments in joint ventures 2.2 1.8Goodwill 0.6 0.6Intangiblefixedassets 39.9 46.1Investment properties 154.9 137.7Property, plant and equipment 106.5 121.5AmountsowedbyotherCo-operativeGroupundertakings 18.6 91.0Other assets 50.0 22.1Prepayments and accrued income 23.0 30.1Deferredtaxassets 83.7 86.1

Total assets 45,697.0 46,138.8

LiabilitiesDepositsbybanks 3,139.7 6,082.4Customer accounts 7 32,067.5 30,828.2Customeraccounts–capitalbonds 8 1,789.6 1,647.1Debtsecuritiesinissue 4,394.0 3,334.3Derivativefinancialinstruments 736.9 591.3Other borrowed funds 976.1 946.5AmountsowedtootherCo-operativeGroupundertakings 330.9 329.2Other liabilities 120.6 221.9Accrualsanddeferredincome 128.6 158.0Provisions for liabilities and charges 58.4 52.8Currenttaxliabilities 51.2 71.0

Total liabilities 43,793.5 44,262.7

Capital and reserves attributable to the Bank’s equity holdersOrdinary share capital 230.0 230.0Sharepremiumaccount 8.8 8.8Retained earnings 1,579.6 1,562.8Available-for-salereserve (11.8) 2.5Cashflow hedging reserve 64.1 38.4

1,870.7 1,842.5Minorityinterests 32.8 33.6

Total equity 1,903.5 1,876.1

Total liabilities and equity 45,697.0 46,138.8



Consolidated statement of cash flowsFortheperiodended30June2010(unaudited)Allamountsarestatedin£munlessotherwiseindicated

Period to Period to 30 June 2010 25 July 2009 Cash flows from operating activitiesProfitbeforetaxation 28.9 24.9Adjustmentsfor:Decreaseinprepaymentsandaccruedincome 7.1 7.1(Decrease)/increaseinaccrualsanddeferredincome (99.5) 17.3Interest payable in respect of subordinated liabilities 22.3 9.4Effectofexchangeratemovements 46.0 (3.7)Effect of non-cash pension costs 0.1 0.1Impairment losses on loans and advances 43.0 73.0Depreciationandamortisation 13.1 9.6Interest amortisation – (6.2)Amortisationofinvestments (36.5) 0.3Lossondisposaloffixedassets 0.6 0.5Unwind of fair-value adjustments arising on transfer of engagements 22.6 –Preference dividend 2.8 3.0

50.5 135.3

(Decrease)/increaseindepositsbybanks (2,942.7) 57.3Increase in customer accounts 1,381.3 595.3Increase/(decrease)indebtsecuritiesinissue 836.1 (120.2)Decreaseinloansandadvancestobanks 185.0 304.9Increase in loans and advances to customers (44.4) (378.9)Decrease/(increase)inamountsowedbyotherCo-operativeGroupundertakings 72.4 (43.2)Increase/(decrease)inamountsowedtootherCo-operativeGroupundertakings 1.7 (127.3)Net movement of other assets and other liabilities 129.1 9.7Incometax(paid)/recovered (33.9) 2.3

Net cash flows from operating activities (364.9) 435.2

Cash flows from investing activitiesPurchase of property, plant, equipment and software (16.2) –Proceeds from sale of property, plant and equipment 2.1 –Purchase of investment securities (750.1) (9,973.3)Proceeds from sale and maturity of investment securities 2,043.8 9,542.3

Net cash flows from investing activities 1,279.6 (431.0)

Cash flows from financing activitiesInterest paid on subordinated loanstock (20.8) (13.0)Proceeds of issued shares – 120.0Preference share dividends paid (2.8) (2.8)Dividendspaidtominorityshareholdersinsubsidiaryundertaking (0.8) (0.8)

Net cash flows from financing activities (24.4) 103.4

Increase in cash and cash equivalents 890.3 107.6

Cash and cash equivalents at beginning of the period 2,387.3 2,324.0

Cash and cash equivalents at end of the period 3,277.6 2,431.6

Cash and balances with central banks 1,556.1 407.6Loans and advances to banks 1,186.4 1,131.3Short-terminvestments 535.1 892.7

3,277.6 2,431.6

Consolidated statement of changes in equityFortheperiodended30June2010(unaudited)


Attributable to equity holders of the company

Available- Cashflow Share Share for-sale hedging Retained Minority Total capital premium reserve reserve earnings Total interest equity

Period from 1 January 2010 to 30 June 2010Atthebeginningoftheperiod 230.0 8.8 2.5 38.4 1,562.8 1,842.5 33.6 1,876.1Totalcomprehensiveincomefortheperiod – – (14.3) 25.7 16.8 28.2 – 28.2Transactions with owners recorded directlyin equity:Dividend – – – – – – (0.8) (0.8)

Total equity 230.0 8.8 (11.8) 64.1 1,579.6 1,870.7 32.8 1,903.5

Period from 26 July 2009 to 31 December 2009Atthebeginningoftheperiod 175.0 8.8 (11.8) 43.9 656.2 872.1 33.2 905.3Amountsarisingontransferofengagements – – – – 811.2 811.2 – 811.2Totalcomprehensiveincomefortheperiod – – 14.3 (5.5) 95.4 104.2 0.5 104.7Transactions with owners recorded directly in equity:Increaseinsharecapital 55.0 – – – – 55.0 – 55.0Dividend – – – – – – (0.1) (0.1)

Total equity 230.0 8.8 2.5 38.4 1,562.8 1,842.5 33.6 1,876.1

Period from 11 January 2009 to 25 July 2009Atthebeginningoftheperiod 55.0 8.8 (16.6) 59.1 641.5 747.8 32.9 780.7Totalcomprehensiveincomefortheperiod – – 4.8 (15.2) 14.7 4.3 1.1 5.4Transactions with owners recorded directly in equity:Increaseinsharecapital 120.0 – – – – 120.0 – 120.0Dividend – – – – – – (0.8) (0.8)

Total equity 175.0 8.8 (11.8) 43.9 656.2 872.1 33.2 905.3



Basis of preparation and accounting policiesFortheperiodended30June2010(unaudited)Allamountsarestatedin£munlessotherwiseindicated

Basis of preparationEUlaw(IASRegulationEC1606/2002)requiresthattheannualconsolidatedfinancialstatementsfortheyearended31December2010arepreparedinaccordance with International Financial Reporting Standards as issued by the InternationalAccounting Standards Board and International FinancialReportingInterpretationsCommitteeguidanceasissuedbytheEuropeanUnion.

The information in this interim financial report 2010 is unaudited and does not constitute statutory accounts within the meaning of section 435 of the CompaniesAct2006.Thecomparativefiguresforthefinancialyearended31December2009arenotthecompany’sstatutoryaccountsforthatfinancialyear.Thoseaccountshavebeen reportedonby thecompany’sauditorsanddelivered to the registrarof companies.The reportof theauditorswasunqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and did not containastatementundersection498(2)or(3)oftheCompaniesAct2006.

Theinterimfinancialreport2010wasapprovedbytheBoardofDirectorson25August2010.

Thiscondensedconsolidatedinterimfinancialreportforthehalf-yearended30June2010hasbeenpreparedinaccordancewiththeDisclosureandTransparencyRulesoftheFinancialServicesAuthorityandwithIAS34(InterimFinancialReporting)asadoptedbytheEuropeanUnion.Theinterimfinancialreportshouldbereadinconjunctionwiththe2009financialstatements,whichhavebeenpreparedinaccordancewithIFRSasadoptedbytheEuropeanUnion.

The accounting policies, methods of computation and presentation adopted by the Bank in the preparation of its interim financial report 2010 are those whichtheBankcurrentlyexpectstoadoptinits2010financialstatementsandareconsistentwiththosedisclosedinthe2009financialstatements.

Going concernTheBank’sbusinessactivitiestogetherwithitsfinancialposition,andthefactorslikelytoaffectitsfuturedevelopmentandperformancearesetoutinthebusinessandfinancialreview.Furtherriskinformationisprovidedintheprincipalriskssection.Inaddition,theriskmanagementsectionofthe2009financialstatements,includestheBank’sobjectives,policiesandprocessesformanagingitsliquidityriskanddetailsoffinancialinstrumentsandhedgingactivities.ThecapitalmanagementsectionprovidesinformationontheBank’scapitalpolicies.

In common with many financial institutions, the Bank meets its day-to-day liquidity requirements through managing both its retail and wholesale funding sources,andisrequiredtomaintainasufficientbufferoverregulatorycapitalrequirementsinordertocontinuetobeauthorisedtocarryonitsbusiness.TheBank’sforecastsandobjectives,takingintoaccountanumberofpotentialchangesintradingperformanceandfundingretention,showthattheBankshouldbeabletooperateatadequatelevelsofbothliquidityandcapital,fortheforeseeablefuture.TheBankhasalsoconsideredanumberofstresstestsoncapitalandliquidityandtheseprovideassurancethattheBankissufficientlycapitalisedandiscomfortablyinexcessofliquiditystresstests.

Consequently, after making enquiries, the directors are satisfied that the Bank has sufficient resources to continue in business for the foreseeable future andhavethereforecontinuedtoadoptthegoing-concernbasisinpreparingthefinancialstatements.

Prior-year restatementsInaccordancewithIFRS3,theBankhastwelvemonthsfromthedateofthemergerwithBritanniainwhichtocompletetheinitialaccountingbasedonfactsandcircumstancesthatexistedatmergerdate.TheBankhasreassessedthecarryingvaluesoftheBritanniaassetsandliabilitiesacquiredandmadethefollowingadjustments.

The carrying value of loans and advances to customers has been increased following a review of the probabilities of default of assets that were neither pastduenorimpairedatthemergerdate.Basedonfurtherinformationthathasbecomeavailable,theBankhasreassessedthefairvalueofprovisionsforliabilitiesandcharges.

The impact of these adjustments is not material to the overall level of adjustments to the carrying values of Britannia assets and liabilities that were made onmergerandthereisnochangetotheamountofgoodwillarising.

Use of estimates and judgmentsThe preparation of financial information requires management to make judgments, estimates and assumptions that affect the application of accounting policiesandthereportedamountsofassets,liabilities,incomeandexpenses.Actualresultsmaydifferfromtheseestimates.

Estimatesandassumptionsarereviewedonanongoingbasis.Revisionstoaccountingestimatesarerecognisedintheperiodinwhichtheestimateisrevisedandinanyfutureperiodsaffected.

ManagementbelievesthattheBank’scriticalaccountingpolicieswherejudgmentisnecessarilyappliedareconsistentwiththoseoutlinedinthe2009financialstatements.

Accounting dateIn2009theBankelectedtochangeitsaccounting-year-enddateto31DecembertoalignwithBritanniaBuildingSocietyfollowingthemergeron1August2009.Thereforethisinterimfinancialreportrelatestothesixmonthperiodto30June2010.Thecomparativeperiodgivenisthatdisclosedintheinterimfinancialreport2009whichcoversthe28-weekperiodto25July2009.

Notes to the interim financial reportFortheperiodended30June2010(unaudited)


1. Segmental information

Initsinterimfinancialreportfortheperiodended25July2009,theBankreporteditsoperatingsegmentsasRetail,CorporateandWholesale,whichwasinlinewiththeinformationpresentedtotheCo-operativeFinancialServicesBoard,thechiefoperatingdecision-makingbodyoftheBank.Atthehighestlevel,theBank’sinternalreportingstructurehasbeenrevisedfollowingthetransferofengagementsofBritanniaBuildingSocietyandissplitbetweenRetailandCorporateandMarkets(CAM),basedondifferencesinproductsandservices.CAMhasbeensplitfurtherintoCorporate,Wholesale,OptimumandPlatform,andBusinessServices.ThislevelofinformationisregularlypresentedtotheBoard.Revenuesareattributedtothesegmentinwhichtheyaregenerated.Transactionsbetweenthereportablesegmentsareonnormalcommercialterms.Internalchargesandtransfer-pricingadjustmentshavebeenreflectedineachsegment.Thecomparativeinformationasat25July2009hasbeenrestatedasappropriatetoreflectthenewsegments.

The Bank is comprised of the following main reportable segments:

Retail• Customer-focusedproductsandservicesforindividuals,soletradersandsmallbusinesses.Thisincludesmortgages,creditcards,consumerloans,

currentaccountsandsavingsproducts;

CAM• Corporate–customer-focusedproductsandservicesforbusinesses.Thisincludeslargecorporateandcommercialentities.Itincludesloans,asset

finance,currentaccountsandsavingsproducts;• Wholesale–thisistheassetandliabilitymanagementacrosstheBank’sbalancesheet,includingtradingactivities;• Optimum and Platform–thisistheintermediarymortgagelenderdealingwithspecialistandmainstreamlending;• Business Services–thebusiness-servicespartoftheCAMsegment;

Other• IncludesothercentralcostsandUnityTrust.UnityTrustisasubsidiarybankoperatinginthecorporatebankingandsocialeconomysectorsonbehalf

oftradeunions.

Retail Corporate and Markets Other Total

Optimum and Business TotalPeriod to 30 June 2010 Corporate Wholesale Platform Services CAM

Interest margin 167.3 61.4 20.9 52.3 1.0 135.6 4.9 307.8 Non-interest income 77.2 18.9 (15.0) 5.3 8.2 17.4 0.8 95.4

Segment operating income 244.5 80.3 5.9 57.6 9.2 153.0 5.7 403.2

Operatingexpenses (213.5) (28.4) (7.8) (20.4) (5.6) (62.2) (5.1) (280.8)Impairment losses on loans and advances (31.0) (10.4) – (0.1) 0.1 (10.4) (1.6) (43.0)

Segment operating profit – 41.5 (1.9) 37.1 3.7 80.4 (1.0) 79.4

Fair-valueamortisation (22.6)Financialservicescompensationschemelevies (3.3)Shareofpost-taxprofitsfromjointventures 0.4 Profit-basedpaymentstomembersofTheCo-operativeGroup (6.7)Significantitems (18.3)

Profit before taxation 28.9

Incometax (12.1)

Profit for the period 16.8

TheBoardreliesprimarilyonnetinterestrevenuetoassesstheperformanceofeachsegment.AsaresultinterestmarginisreportedonanetbasistotheBoard.



Notes to the interim financial reportFortheperiodended30June2010(unaudited)Allamountsarestatedin£munlessotherwiseindicated

1. Segmental information (continued) Period to 30 JuneReconciliation to statutory income statement 2010

Interest marginTotal interest margin for reportable segments 307.8 Fair-valueamortisation (15.5)

Net interest income 292.3

Operating expensesTotaloperatingexpensesforreportablesegments (280.8)Fair-valueamortisation (7.1)

Operatingexpenses (287.9)

Fair-value amortisationTotal interest unwind for reportable segments (22.6)Interest margin unwind 15.5Operatingexpensesunwind 7.1

Fair-valueamortisation –


Optimum and Business TotalPeriod to 25 July 2009 Corporate Wholesale Platform Services CAM

Interestmargin 120.1 55.7 19.1 – 0.2 75.0 7.1 202.2Non-interestincome 70.4 22.0 (3.5) – 4.0 22.5 0.6 93.5

Segment operating income 190.5 77.7 15.6 – 4.2 97.5 7.7 295.7

Operatingexpenses (140.6) (30.4) (4.6) – (1.7) (36.7) (3.7) (181.0)Impairment losses on loans andadvances (49.2) (23.5) – – – (23.5) (0.3) (73.0)

Segment operating profit 0.7 23.8 11.0 – 2.5 37.3 3.7 41.7

Financialservicescompensationschemelevies (2.2)Significantitems (14.6)

Profit before taxation 24.9

Incometax (8.2)

Profit for the period 16.7



1. Segmental information (continued)


Optimum and Business TotalPeriod to 25 July 2009 Corporate Wholesale Platform Services CAM

Total segment assets

30 June 2010 16,551.9 7,959.0 9,225.3 9,223.6 1.2 26,409.1 – 42,961.0 Unallocated assets 1,610.1

Total assets for reportable segments 16,551.9 7,959.0 9,225.3 9,223.6 1.2 26,409.1 – 44,571.1

Statutory reclassifications 1,125.9

Consolidated total assets 45,697.0

31December2009 16,722.6 7,900.5 9,531.1 9,249.4 – 26,681.0 – 43,403.6Unallocatedassets 1,710.6

Total assets for reportablesegments 16,722.6 7,900.5 9,531.1 9,249.4 – 26,681.0 – 45,114.2

Statutoryreclassifications 1,024.6

Consolidatedtotalassets 46,138.8

2. Net interest income Period to Period to 30 June 2010 25 July 2009Interest receivable and similar incomeOnfinancialassetsnotatfairvaluethroughincomeorexpense:

On loans and advances to customers 816.8 240.7On loans and advances to banks 0.9 9.0On investment securities 193.3 29.2

1,011.0 278.9Onfinancialassetsatfairvaluethroughincomeorexpense:Netexpenseonfinancialinstrumentshedgingassets (142.8) 14.6Net interest income on financial instruments not in a hedging relationship (5.0) 4.8

863.2 298.3

Interest expense and similar chargesOnfinancialliabilitiesnotatfairvaluethroughincomeorexpense:

On customer accounts 241.2 69.8On bank and other deposits 275.0 14.1On subordinated liabilities 21.8 12.2On perpetual secured debt 13.9 –

551.9 96.1Onfinancialliabilitiesatfairvaluethroughincomeorexpense:Netexpenseonfinancialinstrumentshedgingliabilities 19.0 –

570.9 96.1




3. Net fee and commission income Period to Period to 30 June 2010 25 July 2009Fee and commission incomeOnitemsnotatfairvaluethroughincomeorexpense 121.0 110.3On trust or fiduciary activities that result from holding or investing in assets on behalf of others 0.7 1.4

121.7 111.7Fee and commission expenseOnitemsnotatfairvaluethroughincomeorexpense 24.7 20.7Onitemsatfairvaluethroughincomeorexpense 3.9 1.5

28.6 22.2

4. Operating expenses Before After significant Significant significantPeriod to 30 June 2010 items items items

Staffcosts:Wagesandsalaries 111.5 5.2 116.7Socialsecuritycosts 9.9 0.4 10.3Pensioncosts–defined-benefitplans 0.2 – 0.2Pensioncosts–defined-contributionplans 14.3 0.5 14.8Other staff costs 11.2 1.2 12.4

147.1 7.3 154.4 Administrativeexpenses 101.9 11.0 112.9 Depreciationofproperty,plantandequipment 12.4 – 12.4 Amortisationofintangiblefixedassets 7.9 – 7.9 Loss on sale of property, plant and equipment 0.6 – 0.6 Operating lease rentals 16.8 – 16.8 Directexpensesfrominvestmentpropertiesthatgeneratedrentalincomeintheperiod 1.1 – 1.1 Directexpensesfrominvestmentpropertiesthatdidnotgeneraterentalincomeintheperiod 0.1 – 0.1

287.9 18.3 306.2

Period to 25 July 2009

Staffcosts:Wagesandsalaries 58.5 3.3 61.8Socialsecuritycosts 4.9 0.3 5.2Pensioncosts–defined-benefitplans 0.1 – 0.1Pensioncosts–defined-contributionplans 6.0 0.5 6.5Otherstaffcosts 10.8 3.3 14.1

80.3 7.4 87.7Administrativeexpenses 82.3 7.2 89.5Depreciationofproperty,plantandequipment 8.8 – 8.8Amortisationofintangiblefixedassets 0.8 – 0.8Lossonsaleofproperty,plantandequipment 0.5 – 0.5Operatingleaserentals 8.3 – 8.3

181.0 14.6 195.6

Thesignificantitemsrelatetonon-recurringrestructuringcosts.



5. Loans and advances to customers 31 December 30 June 2009 2010 restated

Grossloansandadvances 34,272.9 34,267.7Less: allowance for losses on loans and advances to customers (203.1) (194.0)

34,069.8 34,073.7

Loansandadvancestocustomersincludes£8,977.5m(31December2009:£9,492.7m)securitisedundertheBank’ssecuritisationandcovered-bondprogrammes.TheBankremainsexposedtosubstantiallyalloftherisksandrewardsofownershipoftheseassets.

Concentration of exposureTheBank’sexposureisvirtuallyallwithintheUK.Thefollowingindustryconcentrationsofgrossadvancesareconsideredsignificant:

30 June 31 December 2010 2009

Property and construction 4,366.9 4,498.1Retail distribution 475.2 446.9Business and other services 3,814.9 3,658.2Personal–unsecured 1,620.6 1,625.6Personal–secured 23,995.3 24,038.9

34,272.9 34,267.7

Allowance for losses on loans and advances Individual Individual Period to 30 June 2010 mortgage corporate Collective Total

Atthebeginningoftheperiod 2.3 51.3 140.4 194.0 Charge against profits 0.7 12.0 30.3 43.0 Amountswrittenoff (0.2) (9.8) (22.7) (32.7)Unwind of discount allowance – (0.7) (0.7) (1.4)Interest charged on impaired loans – 0.2 – 0.2

Attheendoftheperiod 2.8 53.0 147.3 203.1

Individual Individual Period to 31 December 2009 mortgage corporate Collective Total

Atthebeginningoftheyear 1.5 45.6 140.8 187.9Chargeagainstprofitsfor28weeksto25July2009 0.6 18.9 53.5 73.0Chargeagainstprofitsfor24weeksto31December2009 0.9 14.5 27.7 43.1Amountswrittenoff (0.7) (26.5) (79.2) (106.4)Recoveries – (0.1) – (0.1)Unwindofdiscountallowance – (1.4) (2.4) (3.8)Interestchargedonimpairedloans – 0.3 – 0.3

Attheendoftheyear 2.3 51.3 140.4 194.0

Fair-value adjustments for hedged riskTheBankhasenteredintointerest-rateswapsthatprotectitfromchangesininterestratesonthefloating-rateliabilitiesthatfunditsportfoliooffixed-ratemortgages.Changesinthefairvaluesoftheseswapsareoffsetbychangesinthefairvaluesofthefixed-ratemortgages.Thechangesinfairvalueoffixed-ratemortgagesaredisclosedonthebalancesheetasfair-valueadjustmentsforhedgedriskimmediatelybelowtheloansandadvancestocustomers.

Fair-valueadjustmentstoloansandadvancestocustomersattributabletoportfolio-hedgedriskare£212.4m(31December2009:£66.1m).




6. Investment securities 30 June 31 December 2010 2009Loans and receivables

Listed 120.1 124.3Unlisted 2,077.7 2,376.4

2,197.8 2,500.7Less: allowance for losses on loans and receivables (14.5) (14.5)

2,183.3 2,486.2

Included in cash and cash equivalents – –

Impairment analysis of investment securities – loans and receivables 30 June 31 December 2010 2009

Atthebeginningoftheperiod 14.5 22.5Allowanceforimpairmentlossesto30June2010(to25July2009) – (4.0)Allowanceforimpairmentlossesto31December2009 – (4.0)

Release for the period – (8.0)

Attheendoftheperiod 14.5 14.5

30 June 31 December 2010 2009Available-for-sale

Listed 1,382.7 1,470.4Unlisted 2,571.0 3,058.8

3,953.7 4,529.2Less: allowance for losses on available-for-sale investments (73.2) (71.9)

3,880.5 4,457.3

Included in cash and cash equivalents 535.1 252.0

Impairment analysis of investment securities – available-for-sale 30 June 31 December 2010 2009

Atthebeginningoftheperiod 71.9 69.8Impairmentlossesrecycledthroughequityreservesto30June2010(to25July2009) – 4.0Impairmentlossesrecycledthroughequityreservesto31December2009 – –

Charge for the period – 4.0Exchangeadjustments 1.3 (1.9)

Attheendoftheperiod 73.2 71.9



6. Investment securities (continued)

Reclassification of available-for-sale assetsPursuant to theamendments to IAS39and IFRS7,during2008 theBank reclassifiedspecificavailable-for-sale investmentsecurities to loansandreceivablesatamortisedcost.TheBank identifiedparticularassetsthatwouldhavemetthedefinitionof loansandreceivables(if theyhadnotbeendesignatedasavailableforsale)forwhichat27July2008itconsideredithadtheintentionandabilitytoholdthemfortheforeseeablefutureoruntilmaturity,duetothemarketinsuchinstrumentsbeingconsideredtobeinactive.

AspertheamendmenttoIAS39,thereclassificationsweremadewitheffectfrom27July2008atfairvalueatthatdate.Thetablebelowsetsoutthecarrying value and fair values for the Bank at the balance sheet date: 30 June 31 December 2010 2009Available-for-salefinancialassetstransferredtoloansandreceivables

Amountsreclassifiedin2008Carrying value 130.4 134.8Fairvalue 134.0 138.0

Atthedateoftransferfairvalueequatedtocarryingvalue.Atotherreportingdatesthefairvalueisbasedonquotedmarketpricesbeingtheonlyindicatoroffairvaluethatisavailable.

The table below sets out the amounts that would have been recognised for the Bank in the half year to 2010 and in the period ended 2009, if the reclassification in 2008 had not been made:

Other Other Income or comprehensive Income or comprehensive expense income expense income 30 June 2010 31 December 2009

Available-for-saleinvestmentsreclassifiedto loans and receivables:

Interest income 0.5 – 3.1 –Netimpairmentrelease/(charge) – – 8.0 (4.0)Net change in fair value – 2.3 – 25.6

0.5 2.3 11.1 21.6

At27July2008,theeffectiveinterestratesonavailable-for-saleassetsreclassifiedtoloansandreceivablesatamortisedcostrangedfrom8%to12%withexpectedrecoverablecashflowsasat30June2010of£142.8m(31December2009:£144.2m).

Gainsandlossesfrominvestmentsecurities,includedwithininterestincome,comprise: 31 December 30 June 2010 2009

Derecognitionofavailable-for-saleassets 0.2 7.1




6. Investment securities (continued)

Analysis of investment securities by issuer 30 June 31 December 2010 2009Investment securities issued by public bodies:Governmentsecurities 933.7 942.7Other public sector securities 9.4 9.1

943.1 951.8

Investment securities issued by other issuers:Bank and building society certificates of deposits 1,056.2 849.2

Other debt securities:Credit trading funds 16.5 16.5Structuredinvestmentvehicles – –Other floating-rate notes 1,995.3 2,774.6Mortgage-backedsecurities 2,052.7 2,351.4

4,064.5 5,142.5

6,063.8 6,943.5

Otherfloating-ratenotes(FRNs)relatetosterling,euroandUSdollardenominatedFRNswithmaturitiesrangingfromtwoweekstosixyearsfromthebalancesheetdate.

7. Customer accounts 30 June 31 December 2010 2009

Retail 27,038.0 26,700.1CorporateandMarkets 4,446.6 3,577.1Other 582.9 551.0

32,067.5 30,828.2

TheGrouphasenteredintointerest-rateswapsthatprotectitfromchangesininterestratesonthefloating-rateassetsthatarefundedbyitsfixed-ratecustomeraccounts.Changesinthefairvaluesoftheseswapsareoffsetbychangesinthefairvaluesofthefixed-ratecustomeraccounts.Includedwithincustomeraccountsare‘fair-value-hedged’fixed-rateaccountswithatotalnominalvalueof£547.3m(31December2009:£3,359.3m)againstwhichtherearefair-valueadjustmentsforhedgedriskof£1.5m(31December2009:£9.7m),givingatotalcarryingvalueof£548.8m(31December2009:£3,369.0m).

8. Customer accounts – capital bonds 30 June 31 December 2010 2009

Retail 1,789.6 1,647.1

Thecapitalbondsarefixed-termcustomeraccountswithreturnsbasedonthemovementinanindex(egFTSE100)overthetermofthebond.

Thecapitalbondshavebeendesignatedoninitialrecognitionatfairvaluethroughincomeorexpenseandarecarriedattheirfairvalue.

The fairvalues for thecapitalbondsareobtainedonamonthlybasis fromthe thirdparties that issue theseproducts.Theseexternalvaluationsarereviewedindependentlyusingvaluationsoftwaretoensurethefairvaluesarepricedonaconsistentbasis.

Noneofthechangeinthefairvalueofthecapitalbondsisattributabletochangesintheliability’screditrisk.



8. Customer accounts – capital bonds (continued)

The maximum amount the Bank would contractually be required to pay at maturity for all the capital bonds is £1,791.3m (31 December 2009:£1,653.2m).

TheBankusesswapstocreateeconomichedgesagainstallofitscapitalbonds.Thelossoncapitalbondsintheincomestatementfortheperiodis£11.7m(25July2009:£nil).However,takingintoaccountchangesinfairvalueoftheassociatedswaps,thenetimpacttotheincomestatementfortheperiodisalossof£0.2m(25July2009:£nil).

9. Provision for Financial Services Compensation Scheme (FSCS) levies

TheFSCShasprovidedcompensationtocustomersoffinancialinstitutionsfollowingthecollapseofdeposittakersin2008.ThecompensationpaidouttoconsumersiscurrentlyfundedthroughloansfromHMTreasury.TheBankcouldbeliabletopayaproportionoftheoutstandingborrowingsthattheFSCShasborrowedfromHMTreasury.AdditionallytheBankisobligedtopayitsshareofmanagementexpensesandcompensationbasedupontheBank’sproportionofthetotalmarketprotecteddepositsat31Decemberofeachyear.

TheBankhasprovided£23.7masat30June2010(31December2009:£20.3m)foritsshareoftheleviesthatwillberaisedbytheFSCSincludingtheinterestontheloanfromHMTreasuryinrespectofthe2008/09,2009/10,2010/11and2011/12levyyears.TheprovisionincludesestimatesfortheinterestFSCSwillpayontheloanandoftheBank’smarketparticipationintherelevantperiods.

HowevertheultimateFSCSlevytotheindustryasaresultofthe2008collapsescannotcurrentlybeestimatedreliablyasitisdependentonotherfactorsthatmayaffectamountspayableandthetimingofamountspayable,includingchangesininterestrates,potentialrecoveriesofassetsbytheFSCSandthelevelofprotecteddeposits.ThecurrentarrangementsendinMarch2012andtheFSCShasnotyetissuedanydetailsofarrangementsbeyondthisdate.ThereforetheBankhasnotmadeanyprovisionforfeesbeyondthisperiod.

10. Contingent liability

Payment-protection insuranceThe Bank operates in regulated markets and is subject to significant legislative and regulatory requirements, with the main regulator of the Bank being the FSA.RegulatoryinterventionisanongoingfeatureofUKfinancialservicesandchangescouldimpacttheprofitabilityoftheBank.Currently,themostsignificant regulatory issue with uncertain consequences relates to past sales of payment-protection insurance (PPI). The FSA has considered itsrequirementstothisindustry-wideissueandhasnowsetthemoutinapolicystatementpublishedon10August2010.TheBankhasuntil1December2010tocomplywiththenewrequirements.

RelevantsaleshavebeenmadebytheBankalthoughtheBankceasedsellingthisproductinJanuary2009.TotalcomplaintsreceivedfromcustomersremainlowasaproportionoftotalPPIsalesmade.TheBankisinvestigatingtheimpactofthenewrequirementsbutatthistimeitisnotpracticaltoevaluatethecasesconcerned,northereforetomakeareliableestimateoftheamountofanyprovisionthatmayberequired.Intheremainderoftheyear,theBankwillassesswhatprovisionisappropriate.

11. Related-party transactions

Related-partytransactionsandtransactionswithkeymanagementpersonnelinthehalfyearto30June2010aresimilarinnaturetothosefortheyearended31December2009.Detailsof theBank’s relatedparty transactionsand transactionswithkeymanagementpersonnel for theyearended31December2009canbefoundinthe2009financialstatements.

Anumberofbankingtransactionsareenteredintowithrelatedpartiesinthenormalcourseofbusinessonnormalcommercialterms.

12. Risk analysis

TheBank’sprincipalrisksrelatingtofinancialinstrumentsareconsideredtobeconsistentwiththosereportedinthe2009financialstatements.Furtheranalysisisprovidedintheprincipalriskssectionofthisreport.



Responsibility statement

Weconfirmthattothebestofourknowledge:

• thecondensedsetoffinancialstatementshasbeenpreparedinaccordancewithIAS34(InterimFinancialReporting)asadoptedbytheEU;and

• theinterimmanagementreportincludesafairreviewoftheinformationrequiredby: – DTR4.2.7RoftheDisclosureandTransparencyRules,beinganindicationofimportanteventsthathaveoccurredduringthefirsthalfofthe

financialyearandtheirimpactonthecondensedsetoffinancialstatements;andadescriptionoftheprincipalrisksanduncertaintiesforthe remaininghalfoftheyear;and

– DTR4.2.8RoftheDisclosureandTransparencyRules,beingrelated-partytransactionsthathavetakenplaceinthefirsthalfofthecurrent financialyearandthathavemateriallyaffectedthefinancialpositionorperformanceoftheentityduringthatperiod;andanychangesinthe related-partytransactionsdescribedinthelastannualreportthatcoulddoso.

ByOrderoftheBoard,25August2010

Neville RichardsonChiefexecutive

The Co-operative Bank plc board of directors:

Executive directors:NevilleRichardson ChiefexecutiveRod BulmerTimFranklinPhil LeeJohnReizensteinBarry Tootell

Non-executive directors:BobBurlton Chair (Resigned15April2010)PaulFlowers Chair (Appointed15April2010)Rodney Baker-BatesDuncanBowdlerDavidDaviesPeter HarveyPaul HewittChrisJonesStephenKingsleyPeterMarksBob NewtonBen ReidLenWardleMartynWatesSteveWattsPiersWilliamson

Notice to shareholders

Thehalf-yearlydividendtoPreferenceshareholdersof4.625pper£1preferenceshare,amountingto£2,775,000willbepaidon30November2010toholdersontheregisterat29October2010.

Registered Office: Registrar:1BalloonStreet ComputershareInvestorServicesPLCManchester P.O.Box82M604EP ThePavillions Bridgwater RoadReg.No.990937(England) Bristol BS997NH

Tel: 0870 702 0003

25August2010


36 Co-operative Bank plc

Notes

Printedon80%recycledfibreusingatotallychlorine-freeprocess.DesignedandproducedbyTheChase,Manchester.

The Co-operative Bank plc P.O.Box101,1BalloonStreet,Manchester,M604EP.www.co-operativebank.co.uk

RegisteredNo.990937

the co-operative bank plc interim financial report 2010

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