View the report - Ukar.com

UK Asset Resolution Limited

Interim Financial Report

30 June 2013

UK Asset Resolution Limited Interim Financial Report for the 6 months ended 30 June 2013

6 August 2013

UKAR

Interim Financial Report 30 June 2013

Page 1 of 75



30 June 2013

Introduction On 1 October 2010 UK Asset Resolution Limited ('UKAR') was established as the holding company for Bradford & Bingley plc ('B&B') and Northern Rock (Asset Management) plc ('NRAM'), bringing together the two brands under shared management and a common Board of Directors. UKAR is a private limited company incorporated and domiciled in the United Kingdom, and is wholly owned by the Treasury Solicitor as nominee for HM Treasury. UKAR's mission is 'maximising value for the taxpayer'. All shares in B&B were transferred to the Treasury Solicitor as nominee for HM Treasury on 29 September 2008 as a result of The Bradford & Bingley plc Transfer of Securities and Property etc. Order 2008. On 1 October 2010 all shares in B&B were acquired via a share-for-share exchange by UKAR. UKAR is B&B's ultimate parent undertaking. B&B considers Her Majesty's Government to remain its ultimate controlling party. All shares in NRAM were transferred to the Treasury Solicitor as nominee for HM Treasury on 22 February 2008 as a result of The Northern Rock Transfer Order 2008. On 1 October 2010 all shares in NRAM were acquired via a share-for-share exchange by UKAR. UKAR is NRAM's ultimate parent undertaking. NRAM considers Her Majesty's Government to remain its ultimate controlling party. The 2012 Annual Reports & Accounts of UKAR, B&B and NRAM are available on their websites www.ukar.co.uk, www.bbg.co.uk and www.nram.co.uk. B&B and NRAM are each required by the FCA's Disclosure and Transparency Rules to publish an Interim Financial Report for the 6 months ended 30 June 2013. UKAR as an individual company has no listed debt in issue and therefore is not required to issue an Interim Financial Report. UKAR has voluntarily issued the UKAR Group information contained in this report. This UK Asset Resolution Limited Interim Financial Report comprises three sections: Section A -

Summary of the financial performance and half year results of the UK Asset Resolution Limited Group.

Section B -

Interim Financial Report of Bradford & Bingley plc, prepared in accordance with IAS 34.

Section C -

Interim Financial Report of Northern Rock (Asset Management) plc, prepared in accordance with IAS 34.

UKAR


Page 2 of 75



Contents

30 June 2013 Page

Section A - Summary half year results of UK Asset Resolution Limited Key performance indicators Financial review Primary Statements for the UKAR Group

5 6 15

Section B - Bradford & Bingley plc Interim Financial Report Interim Financial Report Key performance indicators Primary Statements Notes to the Financial Information Statement of Directors' Responsibilities Independent Review Report

17 20 22 28 43 44

Section C - Northern Rock (Asset Management) plc Interim Financial Report Interim Financial Report Key performance indicators Primary Statements Notes to the Financial Information Statement of Directors' Responsibilities Independent Review Report

45 48 50 57 72 73

Contact information

74

UKAR


Page 3 of 75



30 June 2013

Section A Summary half year results of UK Asset Resolution Limited for the 6 months ended 30 June 2013

UKAR Interim Financial Report 30 June 2013

Section A - UKAR

Page 4 of 75



30 June 2013

Key performance indicators ('KPIs') In addition to the primary Financial Statements, UKAR has adopted the following KPIs in managing business performance in the context of the UKAR Group's strategic priorities. Strategic priorities

Optimise the Balance Sheet

Minimise impairment and losses

Reduce costs

Financial measures

6 months to 30 June 2013


12 months to 31 December 2012

Commentary

Total lending balances £bn Secured £bn Unsecured £bn Held for sale £bn

66.1 64.4 1.4 0.3

72.2 69.9 2.3 -

68.7 66.8 1.9 -

Lending balances reduced by 4% during H1 mainly due to £2.0bn of secured residential redemptions. NRAM's standalone unsecured personal loan book was sold in July 2013, and hence is shown at 30 June 2013 as 'held for sale'.

Residential mortgage redemption rate % Residential redemptions £bn

6.1 2.0

6.7 2.4

6.3 4.6

Redemptions are consistent with H2 2012 but have fallen relative to H1 2012, which were impacted by an early repayment charge ('ERC') waiver on the NRAM book.

Government loan repayments £bn Government loan balance £bn

1.35 42.1

0.79 45.8

3.10 43.5

£721m repaid on the NRAM Government Loan and £625m repaid against the B&B Working Capital Facility ('WCF').

Total cash payments to HM Treasury £bn

1.88

1.18

3.97

Total cash paid to HM Treasury during the period. This includes principal and interest repayments, guarantee fees and tax paid. The main driver of the increase year on year is higher principal repayments.

Residential arrears balance : total residential mortgage balance % Residential payments overdue £m

0.25 161.8

0.31 215.1

0.28 185.8

The first of these measures what proportion of the book is nonperforming, related to the total balance of all residential mortgages, and the second the value of customers’ missed payments. The reduction in both KPIs is a reflection of improving arrears performance.

Residential arrears 3 months and over and possessions as % of the book: - by value - by number of accounts Number of residential arrears 3 months and over and possessions cases

4.86 3.77

6.24 4.94

5.54 4.36

21,332

30,222

25,581

Impairment provisions: Residential secured £m Cover % Unsecured £m Cover % Commercial/other £m Cover %

1,317.2 2.03 249.1 15.05 82.4 10.05

1,535.0 2.17 483.3 17.51 106.7 11.28

1,411.1 2.09 403.8 17.56 100.0 11.34

The level of residential impairment Balance Sheet provision reduced by £93.9m from 31 December 2012 and the level of cover decreased from 2.09% to 2.03%. The provision reflects the improved arrears performance.

104.1 104.1

107.8 107.8

267.0 207.3

The decrease in costs reflects the benefits of the integration of the operations of the two businesses and the lower customer base.

0.27 0.27

0.25 0.25

0.32 0.25

Total costs £m Ongoing costs £m* Ratio of costs to average interest-earning assets: - statutory % - ongoing %*

The reduction in arrears reflects both the improvement in collections performance and the continuing benefit to mortgage customers of lower interest rates.

* Ongoing costs exclude certain items that are not expected to recur on an ongoing basis; an analysis of items excluded from ongoing costs is provided on page 9.


Section A - UKAR

Page 5 of 75



30 June 2013

Financial review Performance In addition to the statutory measure of profit, the Board continues to believe it is appropriate to assess performance based on the underlying profit of the business, which excludes non-recurring costs, particularly those associated with the integration of B&B and NRAM, and certain gains such as the repurchase of own liabilities. Also excluded are movements in fair value and hedge ineffectiveness relating to financial instruments which are expected to be held to maturity as opposed to being traded. The commentary on the results in this statement uses underlying profits and its components as the principal measure of performance. Analysis of the difference between the statutory profit and the underlying profit of UKAR is provided below. Underlying profit before tax of £528.8m (H1 2012: £481.4m; FY 2012: £1,096.9m) was £47.4m higher than H1 2012 mainly due lower a lower impairment charge, as a result of continued improvement in the levels of arrears, partly offset by reduced net non-interest income. The number of mortgage accounts 3 or more months in arrears reduced by 29% compared to H1 2012. Compared to H1 2012, underlying net operating income was £37.9m lower at £729.2m (H1 2012: £767.1m; FY 2012: £1,515.4) mainly due to lower non-interest income as the comparative period included £17.5m one-off fair value gains on asset disposals, £5.8m from the sale of properties and £3.4m income for the use of UKAR systems and facilities by Northern Rock plc. Underlying net interest income increased £1.9m to £730.0m (H1 2012: £728.1m; FY 2012: £1,484.9m). Ongoing administrative expenses decreased £3.7m (3%) to £104.1m (H1 2012: £107.8m; FY 2012: £207.3m). Impairment on loans and advances to customers reduced by £79.2m to £91.5m (H1 2012: £170.7m; FY 2012: £241.4m).

Summary Income Statement 6 months to 30 June 2013 £m

UKAR 6 months to 30 June 2012 £m

12 months to 31 December 2012 £m

730.0 (0.8) 729.2 (104.1) (91.5) (4.8) 528.8 8.1 (6.8) (45.0) 2.9 488.0

728.1 39.0 767.1 (107.8) (170.7) (7.2) 481.4 (42.9) (22.5) (65.0) 351.0

1,484.9 30.5 1,515.4 (207.3) (241.4) 30.2 1,096.9 (42.8) (28.4) (59.7) (419.0) 143.5 690.5

Net interest income * Underlying net non-interest income Underlying net operating income Ongoing administrative expenses Impairment on loans to customers Net impairment on investment securities Underlying profit before taxation Unrealised fair value movements on financial instruments Hedge ineffectiveness Other net administrative expenses Provision for customer redress Gain on repurchase of own liabilities Statutory profit before taxation *

Underlying net non-interest income includes net fee and commission income, net gains on financial instruments designated at fair value, net realised gains less losses on investment securities and other operating income. For an analysis of B&B refer to section B and for NRAM section C.


Section A - UKAR

Page 6 of 75



30 June 2013

Financial review (continued) UKAR 6 months to 30 June 2013 £m

6 months to 30 June 2012 £m

1,119.8 31.0 34.2 1,185.0

1,237.5 55.3 45.6 1,338.4

(321.2) (19.5) (114.3) (455.0)

(325.5) (24.5) (260.3) (610.3)

(676.2) (47.4) (415.5) (1,139.1)

730.0

728.1

1,484.9

Interest-earning assets ('IEA') Financed by:

79,081

85,355

84,117

- Interest-bearing funding

54,470

61,222

Net interest income

Interest receivable and similar income On secured loans On other lending On investment securities and deposits Total interest receivable and similar income Interest expense and similar charges On amounts due to banks and HM Treasury * State guarantee fee On debt securities and other Total interest expense and similar charges Net interest income

12 months to 31 December 2012 £m 2,426.2 111.2 86.6 2,624.0

Average balances


Section A - UKAR

Page 7 of 75



30 June 2013

Financial review (continued) Net interest income (continued) In NRAM, net interest margin increased to 2.53% (H1 2012: 2.42%; FY 2012: 2.46%), mainly due to reducing funding costs, partially offset by the higher cost of the Government Loan on which the interest rate payable was increased from Bank Base Rate + 25bps to Bank Base Rate + 100bps with effect from 4 May 2012. Underlying net non-interest income Underlying net non-interest income fell by £39.8m from H1 2012 to (£0.8m) (H1 2012: £39.0m; FY 2012 £30.5m). Net fee and commission income was £7.1m, £3.3m lower than H1 2012 due primarily to lower redemptions and arrears fee income. Included in H1 2012 were one-off fair value gains on asset disposals of £17.5m. Net realised gains less losses on investment securities was an £8.5m loss (H1 2012: £1.3m gain; FY 2012 £14.9m loss) due to the disposal or early maturity of a number of investment securities in both B&B and NRAM. Other operating income is £9.2m lower due to 2012 including property sales (£5.8m) and income for the use of systems and facilities by Northern Rock plc (£3.4m).

Net non-interest income Total net fee and commission income Net gains on financial instruments designated at fair value Net realised gains less losses on investment securities Other operating income Underlying net non-interest income

6 months to 30 June 2013 £m 7.1 (8.5) 0.6 (0.8)

Unrealised fair value movements on financial instruments Hedge ineffectiveness Provision for customer redress Statutory net non-interest income

8.1 (6.8) (45.0) (44.5)

UKAR 6 months to 30 June 2012 £m 10.4 17.5 1.3 9.8 39.0 (42.9) (22.5) (65.0) (91.4)

12 months to 31 December 2012 £m 17.0 17.5 (14.9) 10.9 30.5 (42.8) (28.4) (419.0) (459.7)

For an analysis of B&B refer to section B note 4 and for NRAM section C note 4.

Accounting volatility on derivative financial instruments NRAM and B&B use derivative financial instruments for economic hedging purposes. Some of these are designated and accounted for as IAS 39 compliant fair value or cash flow hedge relationships. Where effective hedge relationships can be established, the movement in the fair value of the derivative is offset in full or in part either by opposite movements in the fair value of the instrument being hedged or by being taken to reserves. Any ineffectiveness arising from different movements in fair value will offset over time. Unrealised fair value movements were £8.1m gain in the period (H1 2012: loss of £42.9m; FY 2012: loss of £42.8m). These generally relate to derivatives that act as an economic hedge but were not treated as an accounting hedge under IAS 39. Following the designation of the basis swaps into cash flow hedge relationships in both B&B and NRAM during H1 2012, the volatility of unrealised fair value movements through the income statement has been greatly reduced.


Section A - UKAR

Page 8 of 75



30 June 2013

Financial review (continued) Provision for customer redress Since the creation of UKAR we have been remediating a series of problems of process and procedure inherited from the legacy businesses. The most significant of these was the mis-selling of Payment Protection Insurance ('PPI') by Northern Rock. During the first half of 2013 levels of PPI claims have reduced and, at the present time, no further provision is required. A further issue we have previously reported is in respect of non-compliant Consumer Credit Act ('CCA') loans. Following the discovery of this issue UKAR's Board commissioned an independent external review, by Deloitte, in order to understand what went wrong in implementing the updated CCA regulations. Deloitte concluded that the defects in CCA regulated loan letters and statements were created in 2008 before UKAR was established and were not known by or escalated to senior management, or the Boards of NRAM or UKAR, prior to 2012. Deloitte's summary of their report was published on UKAR's website on 15 July 2013. UKAR’s Board has accepted Deloitte’s recommendation to strengthen some controls. In 2012 we provided £271m for remediating non-compliant CCA loans and we have now contacted and corrected the accounts of 120,000 customers. During the course of our investigations we identified certain accounts sold by Northern Rock prior to nationalisation which are subject to the same problem. Remediation of these accounts has been the primary driver of incurring an additional £47m of remediation costs. In addition, there was a net release of £2m in respect of provisions for other remediation activities. We continue to monitor all accounts to ensure the appropriate outcomes for customers. Should we find something wrong we will ensure the issues are corrected quickly and affected customers are remediated where required. Ongoing administrative expenses The Group has continued to focus on maximising cost effectiveness and efficiency through continuous improvement. The decrease in costs reflects the benefits of the integration of the operations of the two businesses and the reducing balance sheet. In June the migration of UKAR's IT infrastructure to HCL Technologies Limited ('HCL') was completed, the benefits of which will be seen in 2014 when the old architecture has been decommissioned. The increase in depreciation costs reflects the capital investment in integrating the two businesses. The exit from the Gosforth site in Newcastle has now been completed. Administrative expenses 6 months to 30 June 2013 £m 30.0 3.0 0.3 1.5 0.2 35.0 31.8 11.7 7.4 18.2 104.1

Wages and salaries Social security costs Defined benefit pension costs Defined contribution pension costs Other retirement benefit costs Total staff costs IT costs Outsourced and professional services Depreciation and amortisation Other administrative expenses Ongoing administrative expenses Other net administrative expenses: - Transformation costs - Accelerated depreciation Total other net administrative expenses Total administrative expenses

UKAR 6 months to 30 June 2012 £m 33.5 3.3 0.5 1.8 0.2 39.3 33.0 12.4 4.7 18.4 107.8

12 months to 31 December 2012 £m 65.0 6.6 0.6 3.4 0.5 76.1 56.0 25.5 12.6 37.1 207.3

-

-

51.4 8.3 59.7

104.1

107.8

267.0



Section A - UKAR

Page 9 of 75



30 June 2013

Financial review (continued) Other net administrative expenses No 'other net administrative expenses' have been incurred in H1 2013 (H1 2012: £nil; FY 2012: £59.7m). The costs incurred for the full year 2012 mainly reflect investment in UKAR's IT platform through the transfer to the new outsourced provider HCL, costs associated with the phased exit of the Gosforth site and the write-down of the value of buildings. Arrears and loan impairment Total UKAR loan impairment provisions as at 30 June 2013 were £1,797.0m (H1 2012: £2,125.0m; FY 2012: £1,914.9m) comprising residential mortgages £1,317.2m (H1 2012: £1,535.0m; FY 2012: £1,411.1m), unsecured loans £249.1m (H1 2012: £483.3m; FY 2012: £403.8m), commercial property of £82.4m (H1 2012: £106.7m; FY 2012: £100.0m) and assets held for sale £148.3m. UKAR

Arrears and possessions At

30 June 2013

30 June 2012

Residential

Unsecured

9,251 7.21 165.2 11.75 18.2 1.29

Residential

31 December 2012

Unsecured

Residential

Unsecured

23,376 3.99 3,341.1 5.06 132.3 0.20

31,140 13.67 410.1 21.64 96.9 5.11

Arrears 3 months and over Number of cases Proportion of total cases Asset value Proportion of book Total value of payments overdue Proportion of total book

No. % £m % £m %

19,309 3.41 2,802.4 4.40 111.7 0.18

Possessions Number of cases Proportion of total cases Asset value Proportion of book Total value of payments overdue Proportion of total book New possessions

No. % £m % £m % No.

2,023 0.36 293.3 0.46 19.5 0.03 3,550

Total arrears 3 months and over and possessions Number of cases Proportion of total cases Asset value Proportion of book Total value of payments overdue Proportion of total book

No. % £m % £m %

21,332 3.77 3,095.7 4.86 131.2 0.21

9,251 7.21 165.2 11.75 18.2 1.29

30,222 4.94 4,310.3 6.24 177.9 0.26

32,987 13.22 445.2 19.55 89.8 3.94

25,581 4.36 3,661.6 5.54 153.1 0.23

31,140 13.67 410.1 21.64 96.9 5.11

Payments overdue Total value of payments overdue Proportion of total book

£m %

161.8 0.25

19.5 1.39

215.1 0.31

92.3 4.05

185.8 0.28

99.0 5.22

Loan impairment provision As % of total balances

%

2.03

15.05

2.17

17.51

2.09

17.56

-

27,747 4.53 3,969.4 5.75 153.0 0.22

2,475 0.41 340.9 0.49 24.9 0.04 3,871

32,987 13.22 445.2 19.55 89.8 3.94

-

2,205 0.37 320.5 0.48 20.8 0.03 7,326

-



Section A - UKAR

Page 10 of 75



30 June 2013

Financial review (continued) Arrears and loan impairment (continued) Arrears and loan impairment: residential loans We have continued to invest in improving our debt management operations. As a result of our actions, we have seen arrears in both companies fall notwithstanding the challenging economic conditions. At UKAR level, the number of mortgage accounts 3 or more months in arrears, including those in possession, has reduced by 17% since 31 December 2012, and 29% compared to 30 June 2012. We adhere to the FCA's regulatory guidance regarding Treating Customers Fairly and continue to work closely with customers experiencing, or likely to experience, financial difficulty in maintaining their mortgage payments. We offer a range of measures to support these customers depending upon their individual circumstances and ability to pay with the long term aim of sustaining their mortgage commitments and remaining in their homes. Possession continues to be a last resort. The total number of cases 3 or more months in arrears, including those in possession, reduced by 17% from 25,581 at the end of 2012 to 21,332 cases at 30 June 2013 (H1 2012: 30,222). The total value of debt owed by residential customers has reduced from £185.8m at 31 December 2012 to £161.8m at 30 June 2013 (H1 2012: £215.1m) equivalent to 0.25% of mortgage balances (H1 2012: 0.31%; FY 2012: 0.28%). Provisions for residential loan impairment held on the Balance Sheet have reduced by £217.8m since 30 June 2012 to £1,317.2m (H1 2012: £1,535.0m; FY 2012: £1,411.1m) reflecting the reduction in arrears cases. Total UKAR fraud and professional negligence provisions have reduced by £14.2m since 31 December 2012 to £357.4m (H1 2012: £335.0m; FY 2012: £371.6m). Total UKAR fraud provisions represent coverage of 47% of suspected fraud and professional negligence cases (H1 2012: 38%; FY 2012: 46%). Within the B&B book, fraud and professional negligence provisions have reduced since the year end by £14.3m to £302.0m (H1 2012: £277.4m; FY 2012: £316.3m) mainly as a result of cases written off which were fully provided for. In the NRAM book fraud and professional negligence provisions have increased by £0.1m to £55.4m (H1 2012: £57.6m; FY 2012: £55.3m). As a proportion of balances, the residential impairment provision was 2.03% (H1 2012: 2.17%; FY 2012: 2.09%). The residential loan impairment charge was £61.9m, £56.9m lower than H1 2012 (H1 2012: £118.8m; FY 2012: £187.0m) as the charge benefited from lower arrears volumes. The number of properties in possession for UKAR decreased from 2,475 in H1 2012 to 2,023 (FY 2012: 2,205). Within B&B, possession stock increased from 528 cases at 30 June 2012 to 600 at 30 June 2013 (FY 2012: 717), following a change in strategy whereby Law of Property Act ('LPA') receivers' for sale stock was taken through possession. In NRAM possession stock reduced to 1,423 cases from 1,947 at 30 June 2012 (FY 2012: 1,488). A total of 3,550 properties were taken into possession in the first half of the year (H1 2012: 3,871; FY 2012: 7,326). In addition to residential property possessions, we also have a number of buy-to-let properties within B&B managed by LPA receivers. Our LPA 'for sale' stock decreased from 306 cases at 31 December 2012 to 155 at 30 June 2013, partly due to the change in repossession strategy referred to above. 311 cases were placed for sale by LPA receivers (H1 2012: 702; FY 2012: 758). During H1, 3,732 cases (H1 2012: 4,101; FY 2012: 7,826) were sold following possession and a further 144 cases (H1 2012: 586; FY 2012: 1,237) were sold which were under LPA management. Realised losses on properties sold following possession or sold by an LPA were £179.7m (H1 2012: £236.1m; FY 2012: £458.8m). Within these losses were fraudulent and professional negligence losses within B&B of £16.7m (H1 2012: £27.6m; FY 2012: £55.8m).


Section A - UKAR

Page 11 of 75



30 June 2013

Financial review (continued) Arrears and loan impairment (continued) Arrears and loan impairment: unsecured loans The standalone NRAM unsecured personal loan book was sold in July 2013. These loans are classified as 'held for sale' as at 30 June 2013 and hence are excluded from the figures below. Comparative figures include these loans. The number of unsecured loans 3 months or more in arrears was 9,251 (H1 2012: 32,987; FY 2012: 31,140) cases. The charge for unsecured loan impairment was lower at £39.4m (H1 2012: £45.9m; FY 2012: £42.3m). Asset coverage was 15.1% at 30 June 2013 (FY 2012: 17.6%). The provision for unsecured loans was £249.1m (H1 2012: £483.3m; FY 2012: £403.8m). Realised losses were £30.4m (H1 2012: £72.1m; FY 2012: £155.4m). Arrears and loan impairment: commercial loans The provision for the commercial book has decreased to £82.4m from £106.7m at 30 June 2012 (FY 2012: £100.0m) with coverage at 10.1% (H1 2012: 11.3%; FY 2012: 11.3%). The reduction in provision was mainly due to write-offs of fully provided accounts. We continually review the level of provisions against each individual loan based on current and future property valuations, future rental income projections, tenant quality and general market conditions. Net impairment on investment securities We continue to review securities held on our Balance Sheet, and we believe the risk of further impairment is not significant. We have identified a number of assets in NRAM that require additional impairment resulting in a net charge of £4.8m (H1 2012: charge of £7.2m; FY 2012: credit of £30.2m). Taxation The total Income Statement tax charge for the period ended 30 June 2013 was £116.1m (H1 2012 £79.0m; FY 2012: £126.7m). Given the statutory profit before taxation of £488.0m (H1 2012: £351.0m; FY 2012: £690.5m) this equates to an effective tax rate of 23.8% (H1 2012: 22.5%; FY 2012: 18.3%). Balance Sheet

Balance Sheet summary Loans to customers: - Residential mortgages - Commercial and other secured loans - Unsecured lending - Held for sale Wholesale assets Fair value adjustments on portfolio hedging Derivative financial instruments Other assets Total assets Statutory Debt and HM Treasury loans Wholesale funding Derivative financial instruments Other liabilities Capital instruments Equity Total equity and liabilities

At 30 June 2013

UKAR At 30 June 2012

At 31 December 2012

£m

£m

£m

63,693.4 737.6 1,405.7 312.1 9,892.0 363.6 6,247.3 172.3 82,824.0 42,136.0 33,650.3 621.8 548.2 209.6 5,658.1 82,824.0

69,061.1 839.4 2,276.9 10,561.0 518.4 6,116.3 197.6 89,570.7 45,801.8 37,028.9 824.5 526.6 357.7 5,031.2 89,570.7

66,056.3 781.9 1,895.4 11,778.9 493.8 5,720.2 159.7 86,886.2 43,487.3 36,415.0 783.7 575.9 359.2 5,265.1 86,886.2

For an analysis of B&B refer to section B and for NRAM section C.


Section A - UKAR

Page 12 of 75



30 June 2013

Financial review (continued) Balance Sheet (continued) The Balance Sheet has reduced by £4.1bn since the year end to £82.8bn (H1 2012: £89.6bn; FY 2012: £86.9bn). Lending balances were £2.6bn (3.8%) lower than 31 December 2012, reducing to £66.1bn during the period (H1 2012: £72.2bn; FY 2012: £68.7bn) reflecting £2.0bn of secured residential redemptions. Wholesale asset balances reduced from the year end by £1.9bn to £9.9bn (H1 2012: £10.6bn; FY 2012: £11.8bn) primarily reflecting disposals and lower collateral balances. Liabilities The WCF and HM Treasury loans reduced by £1.3bn from the year end to £42.1bn (H1 2012: £45.8bn; FY 2012: £43.5bn) due to repayments having been made in the year (B&B: £0.6bn, NRAM: £0.7bn). UKAR did not draw down on any facility during the period. In addition, £2.9bn of other external wholesale funding was repaid in the period to 30 June 2013. The sale of the NRAM standalone unsecured personal loan book will result in loans to customers reducing by £0.3bn in July. The sale proceeds will be used to repay a further element of the NRAM Government loan in the third quarter of 2013. Cash payments At the end of 2012, UKAR had £27.8bn of funding from HM Treasury, plus a further £15.7bn owed to the Financial Services Compensation Scheme ('FSCS'). Repayment of this debt remains a primary objective of UKAR. In the period a further £1.3bn (H1 2012: £0.8bn; FY 2012: £3.1bn) of HM Treasury debt was repaid. In addition, other cash flows were generated for Her Majesty's Government in the form of State guarantee fees, interest and taxes. The Board considers the total of all these cash flows paid to HM Treasury to be an important measure. Total cash payments during the 6 months to 30 June 2013 to HM Treasury were £1.9bn (H1 2012: £1.2bn; FY 2012: £4.0bn). Capital The Group's capital is provided by its shareholders (currently HM Treasury) and the holders of subordinated notes and subordinated liabilities. The regulated Group companies met their capital requirements in full throughout the year and have received no additional capital from HM Treasury. Capital Resources - B&B plc (company only) Capital resources - Bradford & Bingley plc At

30 June 2013 £m

Share capital and reserves Available-for-sale reserve adjustments Cash flow hedge reserve adjustments Net pension adjustment Less: deductions Tier 1 capital Capital instruments Total capital


2,614.6 (38.5) (49.8) (11.4) (517.7) 1,997.2 79.9 2,077.1

Section A - UKAR

30 June 2012

31 December 2012

£m 2,394.7 (28.9) (76.0) (97.8) (524.5) 1,667.5 82.5 1,750.0

£m 2,382.6 (17.1) (86.8) (103.3) (521.3) 1,654.1 83.6 1,737.7

Page 13 of 75



30 June 2013

Financial review (continued) Capital (continued) Capital Resources - NRAM plc (company only) Capital resources - Northern Rock (Asset Management) plc At

Share capital and reserves Available-for-sale reserve adjustments Cash flow hedge reserve adjustments Net pension adjustment Reserve capital instruments Tier one notes Less: deductions Tier 1 capital Subordinated notes Subordinated liabilities Total capital

30 June 2013

30 June 2012

£m

£m

2,746.7 55.2 (150.5) (65.4) 101.4 41.5 (0.9) 2,728.0 23.4 2,751.4

2,281.4 92.7 (141.7) (65.4) 101.4 42.3 (1.2) 2,309.5 23.4 150.7 2,483.6

31 December 2012

£m 2,515.1 73.7 (192.2) (43.0) 101.4 41.9 (1.1) 2,495.8 23.4 150.7 2,669.9

B&B plc total capital resources and Tier 1 capital are £339.4m and £343.1m higher than 31 December 2012 respectively, the increases being a result of profits in the year and reduced pension funding costs. In 2012, B&B's Tier 1 capital was adjusted to reflect future payments which B&B had committed to make to address the deficit on the defined benefit pension scheme (30 June 2012: £97.8m; 31 December 2012: £103.3m). At 30 June 2013, as permitted by FCA capital rules, Tier 1 capital has instead been adjusted to remove the balance sheet surplus of £11.4bn. NRAM plc total capital resources are £81.5m higher than 31 December 2012 due to profits generated in the year, partly offset by the maturity of £150.7m subordinated liabilities. Tier 1 capital is £232.2m higher due to profits generated in the period. B&B and NRAM operate under a MIPRU regulatory status. The regulated companies within the UKAR Group are required to hold capital in excess of 1% of total Balance Sheet assets plus any undrawn commitments. However, the Board believes it should hold capital above 1% reflecting the increased risk in the business compared to a standard MIPRU firm, and at 30 June 2013 capital in B&B plc represented 5.8% of B&B company assets; NRAM plc capital represented 6.2% of NRAM company assets. OTHER INFORMATION UK Asset Resolution Limited UKAR was established on 1 October 2010 to facilitate the orderly management of the closed mortgage books of both B&B and NRAM to maximise value for taxpayers. The Executive team of UKAR manages both organisations focusing on this common objective, while ensuring that both companies continue to treat customers fairly, deliver consistently high levels of service and support those customers facing financial difficulty. Bradford & Bingley plc On 29 September 2008, all of B&B’s retail branches and its savings accounts were transferred to Banco Santander Group. The remainder of the business, including the mortgage books of B&B and specialist lending arm Mortgage Express, were nationalised and taken into public ownership by the Government. B&B is permanently closed to new lending, but continues to provide services to some 196,000 existing mortgage borrowers, with 273,000 mortgage accounts. Northern Rock (Asset Management) plc Northern Rock was nationalised and taken into Government ownership in February 2008 and was then restructured into two legal entities with effect from 1 January 2010 - Northern Rock plc and Northern Rock (Asset Management) plc. NRAM retained the majority of the pre-existing mortgage book and all pre-existing unsecured loan accounts. NRAM is permanently closed to new lending, but continues to provide services to some 388,000 existing borrowers, with 292,000 mortgage accounts and 212,000 unsecured loan accounts. UKAR Interim Financial Report 30 June 2013

Section A - UKAR

Page 14 of 75



30 June 2013

UK Asset Resolution Limited - Consolidated Financial Results

Consolidated Income Statement




£m

£m

£m

1,185.0 (455.0) 730.0

1,338.4 (610.3) 728.1

2,624.0 (1,139.1) 1,484.9

13.1 (6.0) 7.1

16.6 (6.2) 10.4

29.3 (12.3) 17.0

Net gains on financial instruments designated at fair value Net realised gains less losses on investment securities Unrealised fair value movements on financial instruments Hedge ineffectiveness Provision for customer redress Other operating income Non-interest income

(8.5) 8.1 (6.8) (45.0) 0.6 (44.5)

17.5 1.3 (42.9) (22.5) (65.0) 9.8 (91.4)

17.5 (14.9) (42.8) (28.4) (419.0) 10.9 (459.7)

Net operating income

685.5

636.7

Administrative expenses: - Ongoing - Other net expenses Impairment on loans to customers Net impairment on investment securities Gain on repurchase of own liabilities Profit before taxation

(104.1) (91.5) (4.8) 2.9 488.0

(107.8) (170.7) (7.2) 351.0

(207.3) (59.7) (241.4) 30.2 143.5 690.5

Taxation

(116.1)

(79.0)

(126.7)

371.9

272.0

563.8

Interest receivable and similar income Interest expense and similar charges Net interest income Fee and commission income Fee and commission expense Net fee and commission income

Profit for the financial period


Section A - UKAR

1,025.2

Page 15 of 75



30 June 2013

Consolidated Financial Results (continued) Consolidated Balance Sheet 30 June 2013

At

30 June 2012

31 December 2012

£m

£m

5,141.0 3,144.2 1,606.8 65,836.7 312.1 363.6 6,247.3 23.9 76.8 28.0 43.6 82,824.0

5,333.6 2,664.2 2,563.2 72,177.4 518.4 6,116.3 44.0 65.4 37.5 50.7 89,570.7

5,599.8 4,129.2 2,049.9 68,733.6 493.8 5,720.2 40.7 43.0 28.7 47.3 86,886.2

4,079.8 42,136.0 621.8 29,570.5 140.6 141.8 41.4 9.6 214.8 209.6 77,165.9

3,158.7 45,801.8 824.5 33,870.2 159.2 160.1 13.4 11.1 182.8 357.7 84,539.5

4,794.9 43,487.3 783.7 31,620.1 169.8 64.1 43.9 70.5 227.6 359.2 81,621.1

1.2 1,305.1 4,227.0 5,533.3

1.2 1,313.0 3,592.2 4,906.4

1.2 1,319.3 3,819.8 5,140.3

124.8

124.8

124.8

5,658.1

5,031.2

5,265.1

82,824.0

89,570.7

86,886.2

£m

Assets Balances with the Bank of England Cash at bank and in hand Investment securities Loans to customers Assets classified as held for sale: loans to customers Fair value adjustments on portfolio hedging Derivative financial instruments Other assets Retirement benefit assets Property, plant and equipment Intangible assets Total assets Liabilities Amounts due to banks Statutory Debt and HM Treasury loans Derivative financial instruments Debt securities in issue Other liabilities Current tax liabilities Deferred tax liabilities Retirement benefit obligations Provisions Capital instruments Total liabilities Equity Issued capital and reserves attributable to equity holder of the parent: - Share capital - Reserves - Retained earnings Share capital and reserves Non-shareholders' funds Total equity Total equity and liabilities


Section A - UKAR

Page 16 of 75

Bradford & Bingley plc


30 June 2013

Section B Bradford & Bingley plc Interim Financial Report for the 6 months ended 30 June 2013


Section B - B&B

Page 17 of 75



30 June 2013

Bradford & Bingley plc Interim Financial Report for the 6 months ended 30 June 2013 KEY HIGHLIGHTS Bradford & Bingley plc  Repaid a further £625m in Government loans, reducing the total amount owed to the Government to £24.8bn.  £218m paid to Government in the form of interest, fees and corporation tax.  Mortgage accounts three or more months in arrears fell by 13% to 5,146 (H1 2012: 7,064; FY 2012: 5,914) from the year end.  Underlying profit before tax increased to £142.3m from £66.3m in H1 2012.  Statutory profit before tax of £144.8m, compared with £45.7m profit in H1 2012. PERFORMANCE ON STRATEGIC PRIORITIES 1. Optimise the Balance Sheet B&B's Balance Sheet has reduced to £37.7bn in the last six months, a decrease of £0.8bn. B&B has repaid £625m of Government funding in the first half of this year (H1 2012: £700m; FY 2012: £1,425m). A further £0.3bn of other external wholesale funding has been repaid. These repayments have been funded largely from a 2% reduction in lending balances (£0.8bn since 31 December 2012). As a result, lending balances stand at £31.7bn at 30 June 2013 (H1 2012: £33.3bn; FY 2012: £32.5bn). Other cash flows were generated for the Government in the first half of the year in the form of guarantee fees, interest and taxes, totalling £218m (H1 2012: £251m; FY 2012: £503m). The Board considers the total of all these cash flows paid to HM Treasury to be an important measure of B&B meeting its objective in terms of maximising taxpayer value. 2. Debt Management The number of accounts in arrears for B&B is lower than the 2012 year end as a direct consequence of proactive arrears management coupled with the continued low interest rate environment. The total number of mortgage cases three or more months in arrears, including those in possession, reduced by 13% since the end of 2012 to 5,146 cases as at 30 June 2013 (H1 2012: 7,064; FY 2012: 5,914). The total amount of arrears owed by residential customers has fallen by £4.9m to £29.7m during the six months to 30 June 2013, a reduction of 14%. Support for customers experiencing payment difficulties B&B has a total of around 196,000 customers: they have 273,000 mortgage accounts. The majority, 95%, of these mortgage loans continue to perform well but we do have a significant number of customers who are finding it difficult to meet their repayments. In those cases, we work closely with customers to offer a range of solutions to help them manage their circumstances. During the first half of 2013, 5,400 arrangements were successfully completed and approximately 400 account modifications were made (H1 2012: 300; FY 2012: 700) to assist customers with their repayments and continue their existing mortgage. We also work with a range of non-fee charging debt advice agencies to help customers reorganise their finances and ensure, wherever possible, that they can continue as homeowners. Research conducted by YouGov and the Money Advice Service shows that individuals who seek advice are twice as likely to have their debt become manageable within 12 months compared to those who do not. Repossession proceedings for customers in arrears are always viewed as a last resort but regrettably, in some situations, this is inevitable. During the first half, the number of properties taken into possession increased by 27% to 952 (H1 2012: 751); however this included 318 transferred from LPA receivers following a change in strategy. The stock of properties in possession at the end of June decreased from 717 at 31 December 2012 to 600 (H1 2012: 528).


Section B - B&B

Page 18 of 75



30 June 2013

Where a buy-to-let landlord is in arrears we endeavour to protect tenants by honouring the terms of all valid Assured Shorthold Tenancy agreements and instructing an LPA receiver to collect rent directly from the tenant, thereby enabling the tenant to stay in the property for the duration of any agreement. 3. Customers and Conduct It is a key objective for UKAR to work with customers to achieve the most appropriate outcome for their particular situation. In addition to our reactive and proactive customer contact strategies for customers in financial difficulty, a further area of focus for UKAR is whether our interest only customers have plans in place to repay their mortgage at the end of their term. During the first half of 2013, we have proactively written to or called a sample of interest only customers, with mortgage terms of ten years or less remaining. This activity is designed to ensure customers are aware of the need to plan for the repayment of the loan at the end of its term and to encourage them to share details of their plans so we can help ensure they are robust. We have had an excellent response to the campaign so far. 4. Reduce costs The Group has continued to focus on reducing costs. Ongoing administrative expenses for the period were consistent with H1 2012 at £48.3m (H1 2012: £48.2m; FY 2012: £93.4m) with the ratio of costs to assets marginally higher than the year-end at 0.27% (H1 2012: 0.26%; FY 2012: 0.25%) due to reducing balance sheet assets. OTHER INFORMATION Bradford & Bingley plc On 29 September 2008, all of B&B’s retail branches and its savings accounts were transferred to Banco Santander Group. The remainder of the business, including the mortgage books of B&B and specialist lending arm Mortgage Express, were nationalised and taken into public ownership by the Government. B&B is permanently closed to new lending, but continues to provide services to some 196,000 existing mortgage borrowers, with 273,000 mortgage accounts.


Section B - B&B

Page 19 of 75



30 June 2013

Key performance indicators ('KPIs') In addition to the primary Financial Statements, B&B has adopted the following KPIs in managing business performance in the context of its strategic priorities. Strategic priorities



Reduce costs

Financial measures




Commentary

Lending balances (secured) £bn

31.7

33.3

32.5

Lending balances reduced by 2% during the period due to £0.6bn of residential redemptions, and £0.2bn of other capital repayments.


4.0 0.6

3.9 0.7

4.0 1.3

Redemptions have fallen slightly compared to H1 2012 due to a smaller mortgage book and the continuing low interest rate environment.


0.63 24.8

0.70 26.2

1.43 25.4

B&B has repaid £0.6bn of the WCF since December 2012. The WCF balance of £6.4bn is within the £11.5bn maximum facility level currently agreed with HM Treasury.


0.84

0.95

1.93

Total cash paid to HM Treasury during the period. This includes principal and interest repayments, guarantee fees and tax paid. The main components of the decrease year on year are £75m lower principal repayments and lower interest payments on the WCF as the balance decreases.


0.09 29.7

0.13 42.4

0.11 34.6

Residential arrears 3 months and over and possessions as % of the book: - by value - by number of accounts Number of residential arrears 3 months and over and possessions cases

2.39 1.88

3.21 2.44

2.72 2.10

5,146

7,064

5,914

Impairment provisions: Residential £m Cover % Commercial £m Cover %

595.2 1.87 49.1 8.47

680.3 2.04 52.3 8.23

637.6 1.96 50.3 8.29

48.3 48.3

48.2 48.2

117.4 93.4

0.27 0.27

0.26 0.26

0.32 0.25

Total costs £m Ongoing costs £m* Ratio of costs to average interest-earning assets: - statutory % - ongoing %*

The first of these measures what proportion of the book is non-performing, related to the total balance of all residential mortgages, and the second the value of customers’ missed payments. The reduction in both KPIs is a reflection of improving arrears performance. The reduction in arrears reflects both the improvement in collections performance and the continuing benefit to mortgage customers of lower interest rates.

The level of the residential impairment Balance Sheet provision reduced by £42.4m from 31 December 2012 and the commercial provision reduced by £1.2m.

Ongoing administrative expenses were consistent with H1 2012. As the balance sheet has continued to decrease this has resulted in a small increase in cost asset ratios.

* Ongoing costs exclude certain items that are not expected to recur on an ongoing basis; an analysis of items excluded from ongoing costs is provided in note 6.


Section B - B&B

Page 20 of 75



30 June 2013

Business review In addition to the statutory measure of profit, the Board believes it is appropriate to assess performance based on the underlying profit of the business, which excludes non-recurring costs, particularly those associated with the integration with NRAM, and certain gains such as the repurchase of own liabilities. Also excluded are movements in fair value and hedge ineffectiveness relating to financial instruments which are expected to be held to maturity as opposed to being traded. An analysis of the difference between the statutory accounting measure of profit and the underlying profit of the B&B Group is provided in the table below. 6 months to 30 June 2013 £m

Summary Income Statement

187.4 9.4 196.8 (48.3) (6.8) 0.6 142.3 0.8 (1.2) 2.9 144.8

Net interest income Underlying net non-interest income* Underlying net operating income Ongoing administrative expenses Impairment on loans to customers Net impairment on investment securities Underlying profit before taxation Unrealised fair value movements on financial instruments Hedge ineffectiveness Other net administrative expenses Provision for customer redress Gain on repurchase of own liabilities Statutory profit before taxation *

6 months to 30 June 2012 £m 143.8 10.5 154.3 (48.2) (43.6) 3.8 66.3 (11.8) (8.8) 45.7

12 months to 31 December 2012 £m 323.1 19.4 342.5 (93.4) (62.1) 51.1 238.1 (6.6) (9.4) (24.0) (12.0) 27.6 213.7

Underlying net non-interest income includes net fee and commission income, net realised gains less losses on investment securities and other operating income.

Summary Balance Sheet

At 30 June 2013 £m

At 30 June 2012 £m

At 31 December 2012 £m

Loans to customers: - Residential mortgages - Commercial and other secured loans Wholesale assets Fair value adjustments on portfolio hedging Derivative financial instruments Other assets Total assets

31,177.3 530.9 3,662.8 243.2 1,963.1 119.5 37,696.8

32,708.0 583.3 2,869.7 343.6 1,873.6 136.8 38,515.0

31,911.3 556.5 3,717.2 341.4 1,800.3 134.9 38,461.6

Statutory Debt and HM Treasury loans Wholesale funding Derivative financial instruments Other liabilities Capital instruments Equity Total equity and liabilities

24,795.2 9,473.6 385.6 189.0 147.6 2,705.8 37,696.8

26,151.2 9,007.3 521.6 190.5 138.5 2,505.9 38,515.0

25,424.2 9,559.1 502.2 265.4 146.2 2,564.5 38,461.6


Section B - B&B

Page 21 of 75



30 June 2013

Bradford & Bingley plc Condensed Financial Statements Consolidated Income Statement 6 months to 30 June 2013



£m

£m

£m

421.3 (233.9) 187.4

466.8 (323.0) 143.8

916.3 (593.2) 323.1

7.2 1.8 0.8 (1.2) 0.4 9.0

7.2 0.1 (11.8) (8.8) 3.2 (10.1)

14.4 1.4 (6.6) (9.4) (12.0) 3.6 (8.6)

196.4

133.7

314.5

6 6 9

(48.3) (6.8) 0.6 2.9 144.8

(48.2) (43.6) 3.8 45.7

(93.4) (24.0) (62.1) 51.1 27.6 213.7

7

(36.1)

(10.5)

(48.4)

108.7

35.2

165.3

Note Interest receivable and similar income Interest expense and similar charges Net interest income

3 3 3

Fee and commission income Net realised gains less losses on investment securities Unrealised fair value movements on financial instruments Hedge ineffectiveness Provision for customer redress Other operating income Non-interest income

5 5

4

Net operating income Administrative expenses: - Ongoing - Other net expenses Impairment on loans to customers Net impairment on investment securities Gain on repurchase of own liabilities Profit before taxation Taxation Profit for the financial period

The B&B Group's business and operations comprise one single activity, principally within the United Kingdom, and it has only one operating segment for the purposes of IFRS 8 'Operating Segments'. The results above arise from continuing activities, and are attributable to the equity shareholder.


Section B - B&B

Page 22 of 75



30 June 2013

Bradford & Bingley plc Condensed Financial Statements (continued) Consolidated Statement of Comprehensive Income 6 months to 30 June 2013


Gross of tax £m

Tax £m

Net of tax £m

144.8

(36.1)

108.7

29.1

(6.8)

22.3

(1.2)

0.3

(0.9)

Other comprehensive income Items that may be reclassified subsequently to profit or loss: Available-for-sale instruments: - Net gains recognised in available-for-sale reserve during the period - Amounts transferred from available-for-sale reserve and recognised in profit during the period Cash flow hedges: - Net gains recognised in cash flow hedge reserve during the period - Amounts transferred from cash flow hedge reserve and recognised in profit during the period Items that will not be reclassified subsequently to profit or loss: Actuarial gains on retirement benefit obligations

Total other comprehensive income Total comprehensive income for the financial period



225.7

(55.4)

170.3

(270.9) (17.3)

66.5 4.6

(204.4) (12.7)

41.7 41.7

(9.6) (9.6)

32.1 32.1

24.4 169.2

(5.0) (41.1)

19.4 128.1

Gross of tax £m

Tax

Net of tax £m

£m

45.7

(10.5)

35.2

9.5

(2.2)

7.3

2.6

(0.6)

2.0

30.2

(7.8)

22.4

3.0 45.3

(0.8) (11.4)

2.2 33.9

(5.4) (5.4)

1.0 1.0

(4.4) (4.4)

39.9 85.6

(10.4) (20.9)

29.5 64.7

Other comprehensive income Items that may be reclassified subsequently to profit or loss: Available-for-sale instruments: - Net gains recognised in available-for-sale reserve during the period - Amounts transferred from available-for-sale reserve and recognised in profit during the period Cash flow hedges: - Net gains recognised in cash flow hedge reserve during the period - Amounts transferred from cash flow hedge reserve and recognised in profit during the period Items that will not be reclassified subsequently to profit or loss: Actuarial losses on retirement benefit obligations



Section B - B&B

Page 23 of 75



30 June 2013

Bradford & Bingley plc Condensed Financial Statements (continued) Consolidated Statement of Comprehensive Income (continued) Gross of tax


Profit for the financial year

Tax

Net of tax

£m

£m

£m

213.7

(48.4)

165.3

Other comprehensive income Items that may be reclassified subsequently to profit or loss: Available-for-sale instruments: - Net losses recognised in available-for-sale reserve during the year - Amounts transferred from available-for-sale reserve and recognised in profit during the year Cash flow hedges: - Net losses recognised in cash flow hedge reserve during the year - Amounts transferred from cash flow hedge reserve and recognised in profit during the year Items that will not be reclassified subsequently to profit or loss: Actuarial losses on retirement benefit obligations

Total other comprehensive income Total comprehensive income for the financial year


Section B - B&B

(0.8) (2.7)

(335.4) 356.5

0.2 0.7

166.9 (177.4)

(0.6) (2.0)

(168.5) 179.1

17.6

(9.6)

8.0

(64.3) (64.3)

14.3 14.3

(50.0) (50.0)

(46.7) 167.0

4.7 (43.7)

(42.0) 123.3

Page 24 of 75



30 June 2013

Bradford & Bingley plc Condensed Financial Statements (continued) Consolidated Balance Sheet At

Note

30 June 2013

30 June 2012

31 December 2012

£m

£m

£m

1,091.0 2,082.5 489.3 31,708.2 243.2 1,963.1 41.0 11.4 24.4 42.7 37,696.8

722.5 1,302.5 844.7 33,291.3 343.6 1,873.6 31.6 31.0 24.7 49.5 38,515.0

841.3 2,252.0 623.9 32,467.8 341.4 1,800.3 60.9 3.0 24.8 46.2 38,461.6

1,208.2 24,795.2 385.6 8,265.4 90.6 39.1 6.9 9.6 42.8 147.6 34,991.0

336.8 26,151.2 521.6 8,670.5 92.3 43.8 11.1 43.3 138.5 36,009.1

1,221.2 25,424.2 502.2 8,337.9 103.8 18.2 70.5 72.9 146.2 35,897.1

361.3 325.6 2,018.9 2,705.8

361.3 364.2 1,780.4 2,505.9

361.3 338.3 1,864.9 2,564.5

37,696.8

38,515.0

38,461.6

Assets Balances with the Bank of England Cash at bank and in hand Investment securities Loans to customers Fair value adjustments on portfolio hedging Derivative financial instruments Other assets Deferred tax assets Retirement benefit assets Property, plant and equipment Intangible assets Total assets

8 8

7

Liabilities Amounts due to banks Statutory Debt and HM Treasury loans Derivative financial instruments Debt securities in issue Other liabilities Current tax liabilities Deferred tax liabilities Retirement benefit obligations Provisions Capital instruments Total liabilities

12

7

Equity Issued capital and reserves attributable to equity holder of the parent: - Share capital - Reserves - Retained earnings Share capital and reserves

13

Total equity and liabilities


Section B - B&B

Page 25 of 75



30 June 2013

Bradford & Bingley plc Condensed Financial Statements (continued) Consolidated Statement of Changes in Equity 6 months to 30 June 2013

At 1 January 2013 Other comprehensive income: - Net movement in available-for-sale reserve - Net movement in cash flow hedge reserve - Actuarial gains - Tax effects of the above Total other comprehensive income Profit for the financial period Total comprehensive income Release of time-expired provision for unclaimed shares and dividends (see note 14) At 30 June 2013

Share Capital AvailableShare premium redemption for-sale capital reserve reserve reserve £m £m £m £m 361.3

198.9

29.2

Cash flow hedge reserve £m

17.1

93.1

Retained earnings £m

Total share capital and reserves £m

1,864.9

2,564.5

-

-

-

27.9

-

-

27.9

-

-

-

-

(45.2)

-

(45.2)

-

-

-

(6.5) 21.4 21.4 -

11.1 (34.1) (34.1) -

41.7 (9.6) 32.1 108.7 140.8 13.2

41.7 (5.0) 19.4 108.7 128.1 13.2

29.2

38.5

59.0

Share Capital premium redemption reserve reserve £m £m

Availablefor-sale reserve £m

29.2

361.3

198.9

2,018.9

2,705.8




19.7

82.5

1,749.6


Share capital £m

At 1 January 2012

361.3

198.9

-

-

-

12.1

-

-

12.1

-

-

-

-

33.2

-

33.2

361.3

198.9

29.2

(2.8) 9.3 9.3 29.0

(8.6) 24.6 24.6 107.1


Share capital £m

Share premium reserve £m

Capital redemption reserve £m

Availablefor-sale reserve £m




At 1 January 2012

361.3

198.9

29.2

19.7

82.5

1,749.6

2,441.2

(3.5)

-

-

(3.5)

-

21.1

-

21.1

0.9 (2.6) (2.6) 17.1

(10.5) 10.6 10.6 93.1

Other comprehensive income: - Net movement in available-for-sale reserve - Net movement in cash flow hedge reserve - Actuarial losses - Tax effects of the above Total other comprehensive income Profit for the financial period Total comprehensive income At 30 June 2012

Other comprehensive income: - Net movement in available-for-sale reserve - Net movement in cash flow hedge reserve - Actuarial losses - Tax effects of the above Total other comprehensive income Profit for the financial year Total comprehensive income At 31 December 2012


-

-

-

-

-

-

361.3

198.9

29.2

Section B - B&B

(5.4) 1.0 (4.4) 35.2 30.8 1,780.4

(64.3) 14.3 (50.0) 165.3 115.3 1,864.9

2,441.2

(5.4) (10.4) 29.5 35.2 64.7 2,505.9

(64.3) 4.7 (42.0) 165.3 123.3 2,564.5

Page 26 of 75



30 June 2013

Bradford & Bingley plc Condensed Financial Statements (continued) Consolidated Cash Flow Statement 6 months to 30 June 2013 £m

Cash flows from operating activities Profit before taxation for the financial period Adjustments to reconcile profit to cash flows generated from/(used in) operating activities: - Depreciation and amortisation - Impairment on loans to customers - Net impairment on investment securities - Gain on repurchase of own liabilities - Income taxes paid - Fair value adjustments on financial instruments - Other non-cash movements Cash flows generated from/(used in) operating activities before changes in operating assets and liabilities Net (increase)/decrease in operating assets: - Loans to customers - Derivative financial instruments receivable - Other assets Net increase/(decrease) in operating liabilities: - Amounts due to banks - Derivative financial instruments payable - Debt securities in issue - Other liabilities - Provisions Net cash generated from operating activities Cash flows from investing activities - Purchase of property, plant and equipment and intangible assets - Proceeds from sale of property, plant and equipment and intangible assets - Proceeds from sale and redemption of investment securities Net cash from investing activities Cash flows used in financing activities - Repayment of Working Capital Facility - Repurchase of own liabilities Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Represented by cash and assets with original maturity of three months or less within: - Balances with the Bank of England - Cash at bank and in hand Total


Section B - B&B



144.8

45.7

213.7

7.0 6.8 (0.6) (2.9) (10.3) 77.1 235.7 457.6

3.8 43.6 (3.8) (49.1) 34.1 74.3

10.6 62.1 (51.1) (27.6) (22.3) (93.7) (152.2) (60.5)

752.8 (162.8) 21.6

744.9 444.4 5.3

1,549.9 517.7 (25.0)

(13.0) (116.6) (324.3) (4.0) (30.1) 581.2

(56.9) (56.3) (703.7) (72.6) (4.4) 375.0

827.5 (75.7) (757.7) 7.5 (21.5) 1,962.2

(3.2) 130.5 127.3

(20.7) 99.4 78.7

(24.5) 0.1 365.0 340.6

(625.0) (3.2) (628.2) 80.3 3,092.6

(700.0) (700.0) (246.3) 2,271.3

(1,425.0) (56.5) (1,481.5) 821.3 2,271.3

3,172.9

2,025.0

3,092.6

1,090.6 2,082.3 3,172.9

722.5 1,302.5 2,025.0

840.9 2,251.7 3,092.6

Page 27 of 75



30 June 2013

Notes to the Financial Information 1. Reporting entity Bradford & Bingley plc ('B&B') is a public limited company incorporated and domiciled in the United Kingdom. The financial information in this Interim Financial Report consolidates B&B and its subsidiaries (including special purpose vehicles ('SPVs')), together referred to as the B&B Group. B&B's Consolidated Financial Statements for the year ended 31 December 2012 are included in B&B's 2012 Annual Report & Accounts available on B&B's website www.bbg.co.uk. As explained in B&B's 2012 Annual Report & Accounts, B&B's accounting reference date has been changed from 31 December to 31 March. B&B's next Annual Report & Accounts will cover the 15 months to 31 March 2014. Prior to that an Interim Financial Report will be published for the period to 30 September 2013.

2. Basis of preparation This Interim Financial Report has been prepared on a going concern basis. At the date of approval of this Interim Financial Report B&B is reliant on the financing facilities and also upon the guarantee arrangements provided to B&B by HM Treasury. Withdrawal of the financing facilities or the guarantee arrangements would have a significant impact on B&B's operations and its ability to continue as a going concern, in which case adjustments may have to be made to reduce the carrying value of assets to recoverable amounts and to provide for further liabilities that might arise. At the date of approval of this Interim Financial Report, HM Treasury has confirmed its intentions to continue to provide funding until at least 1 November 2014. In preparing this Interim Financial Report, including the 2012 comparative financial information where applicable, the B&B Group has adopted for the first time the following statements: - IFRS 13 ‘Fair Value Measurement’. This statement is mandatory for 2013 financial statements, with 2012 comparative information. This standard sets out principles for how to measure the fair value of financial assets and liabilities. It does not change which items are carried at fair value. IFRS 13 has not had any material impact on the B&B Group's fair values. IFRS 13 also requires that Interim Financial Reports from 2013 should include some additional fair value disclosures; these are included in note 15. - The June 2011 amendments to IAS 1 ‘Presentation of Financial Statements’ relating to ‘Presentation of Items of Other Comprehensive Income’. This statement is mandatory for 2013 financial statements, with 2012 comparative information. As a result, the B&B Group's Statement of Comprehensive Income now shows which elements of other comprehensive income may be reclassified subsequently to profit or loss. - The June 2011 amendments to IAS 19 ‘Employee Benefits’. This statement is mandatory for 2013 financial statements, with 2012 comparative information. This was applied in calculating the 2013 cost of the defined benefit pension scheme, and in the calculation of defined benefit scheme assets and obligations as at 30 June 2013. - The Annual Improvements to IFRSs 2009-2011 Cycle, issued in May 2012. These changes are mandatory for 2013 financial statements, with 2012 comparative information. These changes had no material impact on the B&B Group. There have been no other material changes to the accounting policies previously applied by the B&B Group in preparing, and detailed in, its Annual Report & Accounts for the year ended 31 December 2012, which were prepared in accordance with IFRS as adopted by the European Union. The Directors consider that the B&B Group's accounting policies are the most appropriate to its circumstances, have been consistently applied in dealing with items which are considered material, and are supported by reasonable and prudent estimates and judgements. The preparation of this Interim Financial Report requires the use of estimates and assumptions that affect the reported values of assets and liabilities at the Balance Sheet date and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. This Interim Financial Report has been prepared in accordance with IAS 34 'Interim Financial Reporting'. The information in this document does not include all of the disclosures required by IFRS in full annual financial statements, and it should be read in conjunction with the Consolidated Financial Statements of B&B for the year ended 31 December 2012.


Section B - B&B

Page 28 of 75



30 June 2013

Notes to the Financial Information (continued) 3. Net interest income 6 months to 30 June 2013 £m



408.6 12.7 421.3

450.9 15.9 466.8

884.8 31.5 916.3

(183.8) (19.5) (30.6) (233.9) 187.4

(221.8) (24.5) (76.7) (323.0) 143.8

(426.1) (47.4) (119.7) (593.2) 323.1

36,039

37,024

36,968

14,677 21,362

15,765 21,259

15,643 21,325

Interest receivable and similar income On secured loans On investment securities and deposits Total interest receivable and similar income Interest expense and similar charges On amounts due to banks and HM Treasury State guarantee fee** On debt securities and other Total interest expense and similar charges Net interest income Average balances Interest-earning assets ('IEA') Financed by: - Interest-bearing funding - Interest-free funding* Average rates - Gross yield on IEA - Cost of interest-bearing funding Interest spread State guarantee fee** Contribution of interest-free funding * Net interest margin on average IEA Average Bank Base Rate Average 1-month LIBOR Average 3-month LIBOR

% 2.36 (2.95) (0.59) (0.11) 1.75 1.05

% 2.54 (3.81) (1.27) (0.13) 2.18 0.78

% 2.48 (3.49) (1.01) (0.13) 2.01 0.87

0.50 0.49 0.51

0.50 0.71 1.03

0.50 0.62 0.83

* Interest-free funding is calculated as an average over the financial period, and includes the Statutory Debt and share capital and reserves. ** At the time of the nationalisation of B&B, HM Treasury provided guarantees with regard to certain wholesale borrowings and derivative transactions existing at that time. The amount of this fee is dependent on balances outstanding, and hence it is included within 'interest expense and similar charges'.


Section B - B&B

Page 29 of 75



30 June 2013

Notes to the Financial Information (continued) 4. Net non-interest income 6 months to 30 June 2013



£m

£m

£m

Total net fee and commission income Net realised gains less losses on investment securities

7.2 1.8

7.2 0.1

14.4 1.4

Other operating income Underlying net non-interest income

0.4

3.2

3.6

9.4

10.5

19.4

Unrealised fair value movements on financial instruments

0.8

(11.8)

(6.6)

(1.2)

Hedge ineffectiveness

(8.8)

(9.4)

Provision for customer redress

-

-

(12.0)

Statutory net non-interest income

9.0

(10.1)

(8.6)

5. Unrealised fair value movements on financial instruments and hedge ineffectiveness 6 months to 30 June 2013 £m Net gain/(loss) in fair value: - fair value movements on derivatives which are economic hedges but are not in hedge accounting relationships Unrealised fair value movements Net (losses)/gains on fair value hedging instruments Net gains/(losses) on fair value hedged items attributable to hedged risk Net hedge ineffectiveness losses Total

0.8 0.8



(11.8) (11.8)

(6.6) (6.6)

(115.2) 114.0 (1.2)

37.2 (46.0) (8.8)

26.2 (35.6) (9.4)

(0.4)

(20.6)

(16.0)

6. Administrative expenses Certain employees of B&B provide services to NRAM, and the staff numbers below show B&B's employees split by which company they provide services to. NRAM had no direct employees during the periods presented. The monthly average number of persons employed by B&B during the period was as follows: 6 months to 30 June 2013 Number Average headcount: Full time Part time Total employed Providing services to NRAM: Full time Part time Total providing services to NRAM Providing services to B&B: Full time Part time Total providing services to B&B Total average full time equivalent Total average full time equivalent providing services to NRAM Total average full time equivalent providing services to B&B

6 months to 30 June 2012 Number

12 months to 31 December 2012 Number

1,941 442 2,383

1,919 520 2,439

1,923 501 2,424

940 285 1,225

1,072 358 1,430

1,017 342 1,359

1,001 157 1,158 2,237 1,126 1,111

847 162 1,009 2,253 1,295 958

906 159 1,065 2,249 1,234 1,015

The full time equivalent is based on the average hours worked by employees in the period.


Section B - B&B

Page 30 of 75



30 June 2013

Notes to the Financial Information (continued) 6. Administrative expenses (continued) The number of persons employed by B&B at the end of the period was as follows:

At Full time Part time Total employed Providing services to NRAM: Full time Part time Total providing services to NRAM Providing services to B&B: Full time Part time Total providing services to B&B Total full time equivalent headcount Total full time equivalent headcount providing services to NRAM Total full time equivalent headcount providing services to B&B

30 June 2013 Number 1,832 391 2,223

30 June 2012 Number 1,907 507 2,414

31 December 2012 Number 1,965 471 2,436

848 236 1,084

1,062 345 1,407

839 319 1,158

984 155 1,139 2,099 1,005 1,094

845 162 1,007 2,237 1,281 956

1,126 152 1,278 2,277 1,046 1,231

Staff numbers include Executive but not Non-Executive Directors. In addition to the permanent staff above, B&B employed a full-time equivalent of 156 temporary staff and specialist contractors at 30 June 2013 (30 June 2012: 167; 31 December 2012: 191). 6 months to 30 June 2013 £m B&B's costs of permanent staff were as follows: Wages and salaries Social security costs Defined benefit pension costs Defined contribution pension costs Other retirement benefit costs Total staff costs IT costs Outsourced and professional services Depreciation and amortisation Other administrative expenses Ongoing administrative expenses Other net administrative expenses: - Transformation costs* Total other net administrative expenses Total



13.0 1.4 1.4 0.9 0.2 16.9 15.6 6.2 2.9 6.7 48.3

12.9 1.8 0.7 0.9 0.2 16.5 13.7 7.1 0.5 10.4 48.2

28.0 3.0 0.9 1.4 0.5 33.8 25.9 13.4 4.7 15.6 93.4

48.3

48.2

24.0 24.0 117.4

*Transformation costs relate to the integration with NRAM into UKAR.

7. Taxation Taxation appropriately reflects changes in tax rates which had been substantively enacted by 30 June 2013. The tax charge for the period included an overseas tax charge of £nil (£nil for 2012). The tax charge for the 6 months to 30 June 2013 has been calculated using the expected effective tax rate for the 15 month period to 31 March 2014, ie 23.2% (year ended 31 December 2012: 24.5%). Deferred taxation appropriately reflects a change to the standard rate of UK corporation tax to 23% with effect from 1 April 2013. The announced further rate reductions to 20% with effect from 1 April 2015, which were substantively enacted on 17 July 2013, would have maximum potential impact of reducing B&B's deferred tax assets by approximately £4.3m. No deferred tax assets were unrecognised at 30 June 2013 (at 30 June 2012: £2.5m; and at 31 December 2012: £nil of deferred tax assets were unrecognised, relating to unused tax losses of £10.3m at 30 June 2012). £11.0m (30 June 2012: £42.1m; 31 December 2012: £22.5m) of deferred tax assets have been recognised in respect of tax losses carried forward. Based upon detailed business plans, there will be sufficient taxable profits in future years to utilise the losses on which deferred tax has been recognised.


Section B - B&B

Page 31 of 75



30 June 2013

Notes to the Financial Information (continued) 8. Loans to customers Residential mortgages include all of the B&B Group's buy-to-let loans. commercial properties.

Commercial loans comprise loans secured on

All of the B&B Group's loans to customers are to UK customers. Balances include accounting adjustments in respect of provisioning requirements. Loans to customers include loans amounting to £18,968.8m (30 June 2012: £19,832.5m; 31 December 2012: £19,393.4m) which have been sold to bankruptcy remote SPVs whereby substantially all of the risks and rewards of the portfolio are retained by B&B. Accordingly, all of these loans are retained on B&B's Balance Sheet. Further details are provided in note 12. Fair value adjustments on portfolio hedging amounting to £243.2m (30 June 2012: £343.6m; 31 December 2012: £341.4m) relate to fair value adjustments to loans to customers in relation to interest rate risk as a result of their inclusion in a fair value portfolio hedge relationship. Loans to customers comprise the following product types: Balances At 30 June 2013 £m

%

Redemptions 6 months to 30 June 2013 £m

Balances At 30 June 2012 £m

%


Residential mortgages Buy-to-let Self Cert Standard and other Total residential mortgages Residential loans Commercial loans

20,308.0 6,393.7 4,475.6 31,177.3 31,177.3 530.9

65 21 14 100 98 2

(328.5) (129.0) (169.9) (627.4) (627.4) (26.2)

21,145.6 6,731.8 4,830.6 32,708.0 32,708.0 583.3

65 20 15 100 98 2

(307.7) (143.1) (202.1) (652.9) (652.9) (5.9)

Total

31,708.2

100

(653.6)

33,291.3

100

(658.8)

Balances At 31 December 2012 £m

%

Redemptions 12 months to 31 December 2012 £m

Residential mortgages Buy-to-let Self Cert Standard and other Total residential mortgages Residential loans Commercial loans

20,694.4 6,561.8 4,655.1 31,911.3 31,911.3 556.5

65 20 15 100 98 2

(646.4) (291.0) (394.5) (1,331.9) (1,331.9) (35.7)

Total

32,467.8

100

(1,367.6)

Redemptions comprise full redemptions and voluntary partial redemptions, but exclude overpayments and regular monthly payments.


Section B - B&B

Page 32 of 75



30 June 2013

Notes to the Financial Information (continued) 9. Impairment on loans to customers Allowances for credit losses against loans to customers have been made as follows:

On commercial loans £m

Total £m

637.6

50.3

687.9

(66.8) 24.4 (42.4) 595.2

(1.2) (1.2) 49.1

(66.8) 23.2 (43.6) 644.3

24.4 (16.4)

(1.2) -

23.2 (16.4)

8.0

(1.2)

6.8

On residential mortgages £m


Total £m

At 1 January 2012 Movements during the period: - Write-offs - Loan impairment charge Net movements during the period

718.1

52.3

770.4

(85.5) 47.7 (37.8)

-

(85.5) 47.7 (37.8)

At 30 June 2012 The Income Statement charge comprises: - Loan impairment charge - Recoveries net of costs

680.3

52.3

732.6

6 months to 30 June 2013 At 1 January 2013 Movements during the period: - Write-offs - Loan impairment charge Net movements during the period At 30 June 2013 The Income Statement charge comprises: - Loan impairment charge - Recoveries net of costs


Total Income Statement charge


Total Income Statement charge

12 months to 31 December 2012 At 1 January 2012 Movements during the year: - Write-offs - Loan impairment charge Net movements during the year At 31 December 2012 The Income Statement charge comprises: - Loan impairment charge - Recoveries net of costs Total Income Statement charge

47.7 (3.8)

(0.3)

47.7 (4.1)

43.9

(0.3)

43.6



Total £m

718.1

52.3

770.4

(175.8) 95.3 (80.5) 637.6

(2.0) (2.0) 50.3

(175.8) 93.3 (82.5) 687.9

95.3 (30.8)

(2.0) (0.4)

93.3 (31.2)

64.5

(2.4)

62.1

In the Balance Sheet the carrying values of loans to customers are presented net of these impairment allowances.


Section B - B&B

Page 33 of 75



30 June 2013

Notes to the Financial Information (continued) 10. Credit quality of loans to customers In respect of loans to residential customers, the B&B Group holds collateral in the form of mortgages over residential properties. The fair value of this collateral was as follows:

At Neither past due nor impaired Past due but not impaired Impaired Total

30 June 2013 £m 42,198.0 1,760.6 305.8 44,264.4

30 June 2012 £m 42,314.9 2,067.3 450.4 44,832.6

31 December 2012 £m 41,467.9 1,815.6 362.9 43,646.4

If the collateral amount on each individual loan were capped at the amount of the balance outstanding, and any surplus of collateral values over balances outstanding ignored, the fair value of collateral held would be as follows:

At

30 June 2013 £m

30 June 2012 £m

31 December 2012 £m

Neither past due nor impaired Past due but not impaired Impaired

29,671.5 1,415.4 274.9

30,490.5 1,732.3 417.4

29,972.9 1,515.7 335.7

Total

31,361.8

32,640.2

31,824.3

The impaired balances above include £63.4m (30 June 2012: £58.4m; 31 December 2012: £71.2m) of assets in possession, capped at the balance outstanding. The fair value of the collateral is estimated by taking the most recent valuation of the property and adjusting for house price inflation or deflation up to the Balance Sheet date. The indexed loan to value ('LTV') of residential loan balances, weighted by loan balance, falls into the following ranges: 30 June 30 June 31 December 2013 2012 2012 At % % % 7.0 To 50% 7.2 7.0 19.8 50% to 75% 16.9 18.1 49.0 75% to 100% 47.4 47.7 24.2 Over 100% 28.5 27.2 Total 100.0 100.0 100.0 100 100 The average indexed loan to value based on a simple average is 71.8% (30 June 2012: 74.5%; 31 December 2012: 74.6%) and on a weighted average is 85.0% (30 June 2012: 87.0%; 31 December 2012: 86.4%). At 30 June 2013

Neither past due nor impaired Past due but not impaired: - less than 3 months - 3 to 6 months - over 6 months Impaired

Residential mortgages £m 29,997.2 983.2 279.8 190.7 321.6 31,772.5 (595.2) 31,177.3

Impairment allowances Loans to customers net of impairment allowances Impairment allowances: - individual - collective Total impairment allowances


90.5 504.7 595.2

Section B - B&B

Commercial loans £m 396.6 183.4 580.0 (49.1) 530.9 49.1 49.1

Total £m 30,393.8 983.2 279.8 190.7 505.0 32,352.5 (644.3) 31,708.2 139.6 504.7 644.3

Page 34 of 75



30 June 2013

Notes to the Financial Information (continued) 10. Credit quality of loans to customers (continued) At 30 June 2012

Neither past due nor impaired Past due but not impaired: - less than 3 months - 3 to 6 months - over 6 months Impaired Impairment allowances Loans to customers net of impairment allowances Impairment allowances: - individual - collective Total impairment allowances

Neither past due nor impaired Past due but not impaired: - less than 3 months - 3 to 6 months - over 6 months Impaired

Residential mortgages £m 31,067.2

Commercial loans £m 422.2

Total £m 31,489.4

1,176.9 374.3 251.3 518.6 33,388.3 (680.3) 32,708.0

213.4 635.6 (52.3) 583.3

1,176.9 374.3 251.3 732.0 34,023.9 (732.6) 33,291.3

155.3 525.0 680.3

Residential mortgages £m 30,562.4 1,053.2 306.8 216.7 409.8 32,548.9 (637.6) 31,911.3


122.2 515.4 637.6

52.3 52.3

207.6 525.0 732.6

At 31 December 2012 Commercial loans Total £m £m 397.9 30,960.3 208.9 606.8 (50.3) 556.5 50.3 50.3

1,053.2 306.8 216.7 618.7 33,155.7 (687.9) 32,467.8 172.5 515.4 687.9

'Impaired' loans are those which are 12 months or more in arrears, in possession or held for sale with a LPA receiver, and others which management consider to be individually impaired. The above table includes balances within 'neither past due nor impaired' which would have been shown as past due or impaired other than due to renegotiation; these were loans where arrears were capitalised during the previous 12 months. These loans amounted to £5.5m for the 12 months to 30 June 2013 (£12.5m for the 12 months to 30 June 2012; £7.5m for the 12 months to 31 December 2012). A loan is eligible for capitalisation of arrears only once the borrower has complied with stringent terms for a set period. The B&B Group also offers other forbearance methods to borrowers, subject to compliance with loan terms, the aim of these being to assist the borrower to reduce the level of arrears. Management have taken into consideration the forbearance options in applying loan default probabilities and in their overall assessment of the total impairment provision.


Section B - B&B

Page 35 of 75



30 June 2013

Notes to the Financial Information (continued) 11. Arrears and possessions on residential mortgages Arrears and possessions are monitored for the B&B Group as a whole, and also split by type of product.

At Arrears 3 months and over

30 June 2013

30 June 2012

31 December 2012

Number of cases Proportion of total cases Asset value Proportion of book Total value of payments overdue Proportion of total book

No. % £m % £m %

4,546 1.66 654.9 2.07 19.0 0.06

6,536 2.26 967.6 2.95 29.8 0.09

5,197 1.85 760.7 2.38 23.1 0.07


No. % £m % £m % No.

600 0.22 88.8 0.28 4.2 0.01 952

528 0.18 83.9 0.26 5.2 0.02 751

717 0.25 108.2 0.34 4.7 0.02 1,760


No. % £m % £m %

5,146 1.88 743.7 2.39 23.2 0.07

7,064 2.44 1,051.5 3.21 35.0 0.11

5,914 2.10 869.0 2.72 27.8 0.09

In respect of all arrears (including those which are less than 3 months in arrears) together with possessions, the total value of payments overdue was: Payments overdue £m 29.7 Total value of payments overdue 42.4 34.6 % 0.09 Proportion of total book 0.13 0.11 Loan impairment provision As % of residential balances


%

Section B - B&B

1.87

2.04

1.96

Page 36 of 75



30 June 2013

Notes to the Financial Information (continued) 11. Arrears and possessions on residential mortgages (continued) Analysis of residential mortgages 3 months and over in arrears by product

At

30 June 2013

30 June 2012

31 December 2012

Buy-to-let Number of cases Proportion of total cases Asset value Proportion of book Total value of payments overdue Proportion of total book

No. % £m % £m %

1,967 1.13 276.2 1.36 7.9 0.04

3,144 1.74 462.4 2.19 14.7 0.07

2,206 1.24 319.3 1.54 10.2 0.05

Self Cert Number of cases Proportion of total cases Asset value Proportion of book Total value of payments overdue Proportion of total book

No. % £m % £m %

1,353 3.18 239.3 3.74 6.3 0.10

1,774 4.00 309.2 4.59 8.4 0.12

1,563 3.60 273.4 4.17 7.2 0.11

Standard and other Number of cases Proportion of total cases Asset value Proportion of book Total value of payments overdue Proportion of total book

No. % £m % £m %

1,226 2.16 139.4 3.12 4.8 0.11

1,618 2.51 196.0 4.06 6.7 0.14

1,428 2.36 168.1 3.61 5.7 0.12

12. Debt securities in issue Securitised notes £m

Covered Bonds £m

Other £m

Total £m

At 1 January 2013 Repayments Other movements At 30 June 2013

4,276.3 (138.6) 166.9 4,304.6

3,602.3 83.3 3,685.6

459.3 (185.7) 1.6 275.2

8,337.9 (324.3) 251.8 8,265.4

Securitised assets

10,176.4

8,825.8

-

Securitised notes £m

Covered Bonds £m

Other £m

4,823.7 (238.4) (66.7) 4,518.6

3,990.3 (125.1) (289.5) 3,575.7

691.5 (91.7) (23.6) 576.2

10,629.8

9,202.7

-

Securitised notes £m

Covered Bonds £m

Other £m

Total £m

4,823.7 (367.8) (83.9) (95.7) 4,276.3

3,990.3 (190.3) (197.7) 3,602.3

691.5 (199.6) (32.6) 459.3

9,505.5 (757.7) (83.9) (326.0) 8,337.9

10,402.9

8,990.5

-

At 1 January 2012 Repayments Other movements At 30 June 2012 Securitised assets

At 1 January 2012 Repayments Repurchase Other movements At 31 December 2012 Securitised assets


Section B - B&B

19,002.2

Total £m 9,505.5 (455.2) (379.8) 8,670.5 19,832.5

19,393.4

Page 37 of 75



30 June 2013

Notes to the Financial Information (continued) 12. Debt securities in issue (continued) Other movements comprise exchange rate movements, accrued interest and hedge accounting adjustments. The B&B Group issued debt securities to securitise loans and advances to customers through SPVs and Covered Bonds, and also raised unsecured medium term funding, the amounts of which are shown above. Certain of these were subject to fair value hedge designation, and the carrying values of these instruments include unamortised adjustments in respect of the notes that were hedged. HM Treasury has provided guarantees with regards to certain wholesale borrowings; B&B pays a fee for these guarantees as shown in note 3. Securitised assets represent loans to customers which have been used to securitise issued notes, including notes which are held by other B&B companies.

13. Reserves Reserves comprise the following: At

Share premium reserve Capital redemption reserve Available-for-sale reserve Cash flow hedge reserve Total

30 June 2013

30 June 2012

31 December 2012

£m 198.9 29.2 38.5 59.0 325.6

£m 198.9 29.2 29.0 107.1 364.2

£m 198.9 29.2 17.1 93.1 338.3

14. Release of time-expired provision for unclaimed shares and dividends Following demutualisation of Bradford & Bingley Building Society in 2000, a number of shares in B&B were unclaimed as the Registered Holders could not be traced. In accordance with B&B's Articles of Association, these shares were sold in March 2004 and the proceeds have been held by B&B for a further period of nine years to satisfy any claims received from the Registered Holders who were originally entitled to the shares. During this period B&B has sought periodically to trace the Registered Holders. The Registered Holders' entitlement to the proceeds of the sale of the unclaimed shares expired in March 2013, and the remaining provision of £13.2m has, therefore, been released to retained earnings.

15. Capital structure Capital resources - Bradford & Bingley plc (company only) At

30 June 2013 £m 2,614.6 (38.5) (49.8) (11.4) (517.7) 1,997.2 79.9 2,077.1

Share capital and reserves Available-for-sale reserve adjustments Cash flow hedge reserve adjustments Net pension adjustment Less: deductions Tier 1 capital Capital instruments Total capital

30 June 2012

31 December 2012

£m

£m

2,394.7 (28.9) (76.0) (97.8) (524.5) 1,667.5 82.5 1,750.0

2,382.6 (17.1) (86.8) (103.3) (521.3) 1,654.1 83.6 1,737.7

In 2012, Tier 1 capital was adjusted to reflect future payments which B&B had committed to make to address the deficit on the defined benefit pension scheme (30 June 2012: £97.8m; 31 December 2012: £103.3m). At 30 June 2013, as permitted by FCA capital rules, Tier 1 capital has instead been adjusted to remove the balance sheet surplus of £11.4bn.


Section B - B&B

Page 38 of 75



30 June 2013

Notes to the Financial Information (continued) 16. Fair value disclosures (a) Categories of financial assets and financial liabilities: carrying value compared to fair value The following table summarises the carrying amounts and the fair values of financial assets and liabilities: At 30 June 2013 Financial assets: Balances with the Bank of England Cash at bank and in hand Investment securities Loans to customers Fair value adjustments on portfolio hedging Derivative financial instruments Other financial assets Total financial assets

Financial liabilities: Amounts due to banks Statutory Debt and HM Treasury loans Derivative financial instruments Debt securities in issue Capital instruments Other financial liabilities Total financial liabilities At 31 December 2012 Financial assets: Balances with the Bank of England Cash at bank and in hand Investment securities Loans to customers Fair value adjustments on portfolio hedging Derivative financial instruments Other financial assets Total financial assets

Financial liabilities: Amounts due to banks Statutory Debt and HM Treasury loans Derivative financial instruments Debt securities in issue Capital instruments Other financial liabilities Total financial liabilities

Carrying value £m

Fair value £m

1,091.0 2,082.5 489.3 31,708.2 243.2 1,963.1 36.9 37,614.2

1,091.0 2,082.5 489.3 31,728.6 1,963.1 36.9 37,391.4

Carrying value £m

Fair value £m

1,208.2 24,795.2 385.6 8,265.4 147.6 90.6 34,892.6

1,208.2 24,795.2 385.6 7,963.4 82.7 90.6 34,525.7

Carrying value £m

Fair value £m

841.3 2,252.0 623.9 32,467.8 341.4 1,800.3 56.7 38,383.4

841.3 2,252.0 623.9 32,479.1 1,800.3 56.7 38,053.3

Carrying value £m

Fair value £m

1,221.2 25,424.2 502.2 8,337.9 146.2 90.6 35,722.3

1,221.2 25,424.2 502.2 8,047.1 73.9 90.6 35,359.2

Note: the fair values above as at 31 December 2012 have not been restated to comply with IFRS 13. differences between these fair values and IFRS 13-compliant fair values would not be material.

However, any

The only financial assets and liabilities which are carried at fair value on the Balance Sheet are investment securities and derivative financial assets and liabilities. The valuation techniques and inputs used to derive fair values at 30 June 2013 are as follows.


Section B - B&B

Page 39 of 75



30 June 2013

Notes to the Financial Information (continued) 16. Fair value disclosures (continued) (a) Categories of financial assets and financial liabilities: carrying value compared to fair value (continued) Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where an active market is considered to exist, fair values are based on quoted prices or lead manager prices. For instruments which do not have active markets, fair value is calculated using present value models, which take individual cash flows together with assumptions based on market conditions and credit spreads, and are consistent with accepted economic methodologies for pricing financial instruments. (b) Valuation bases Financial assets and liabilities carried at fair value are valued on the following bases; At 30 June 2013 Financial assets Investment securities - available for sale Derivative financial instruments Financial liabilities Derivative financial liabilities Net financial assets Level 1: Level 2: Level 3:

Level 1 £m

Level 2 £m

Level 3 £m

Total £m

171.8 -

317.5 1,963.1

-

489.3 1,963.1

171.8

(385.6) 1,895.0

-

(385.6) 2,066.8

Quoted prices (unadjusted) in active markets for identical assets and liabilities. Inputs other than quoted prices that are observable for the asset or liability, whether directly (ie as price) or indirectly (ie derived from the implications of prices). Inputs for the asset or liability that are not based on observable market data, or have significant unobservable inputs.

There were no transfers between Level 1 and Level 2 during the 6 months ended 30 June 2013. Available-for sale investment securities which are categorised as Level 2 are those which are less frequently traded, and hence trade prices are not considered sufficient evidence of fair value. Fair value is estimated by the securities' lead managers by calculating discounted expected future cash flows, also taking into account recent trades, similar assets adjusted for credit spreads, and where applicable the underlying performance of assets backing the securities. Derivative financial instruments which are categorised as Level 2 are those which either: (a) Have future cash flows which are on known dates and for which the cash flow amounts are known or calculable by reference to observable interest and foreign currency exchange rates; or (b) Have future cash flows which are not pre-defined, but for which the fair value of the instrument has very low sensitivity to changes in estimate of future cash flows. In each case the fair value is calculated by discounting future cash flows using benchmark, observable market interest rates.

17. Related party disclosures B&B considers the Board of Directors and the members of the Executive Committee to be the key management personnel. Transactions during the period with B&B's key management personnel and other related parties were similar in nature to those during the year ended 31 December 2012. B&B repaid £625m of the WCF during the period (6 months to 30 June 2012: £700m; 12 months to 31 December 2012: £1,425m).


Section B - B&B

Page 40 of 75



30 June 2013

Notes to the Financial Information (continued) 18. Contingent liabilities On 20 January 2009 a solicitor's letter was received notifying B&B and certain present and former B&B directors of a potential claim by former individual shareholders who subscribed for additional shares in the £401m rights issue approved on 17 July 2008. These former shareholders claim to have suffered loss through having been induced to subscribe for shares in the rights issue by allegedly materially misleading and/or incomplete statements made in the associated prospectus dated 24 June 2008 as revised and supplemented by the supplementary prospectus dated 11 July 2008. Should such a claim result in proceedings which are pursued through the courts and which succeed, the defendant directors and/or B&B could be liable in damages to certain former shareholders in B&B who subscribed for shares in the rights issue. In May 2009 B&B together with its legal advisors responded to the allegations raised. Nothing further was heard until 23 January 2012 when further correspondence was received from the solicitors representing the former shareholders, to which B&B together with its legal advisors responded. This correspondence contained no further allegations or details of the former shareholders’ potential claim. It is not possible at this stage to determine the outcome or timing of any conclusion to this matter. No provision has been made in respect of these allegations.

19. Risks and uncertainties The Directors are aware of the following material risks and uncertainties which may affect B&B during the period to 31 March 2014: external economic factors including unemployment, house price movements, the extent and timing of changes in interest rates, the rate of interest charged on the WCF and the rate of the Government guarantee fee. There may be other risks that are not listed above that the Directors are not aware of or that the Directors do not consider material. The business, financial condition or results of operations of B&B could be adversely affected by any of these risks. Further discussion of risk management and control were provided on pages 10-12 of B&B's 2012 Annual Report & Accounts.

20. Events after the reporting period The Directors are of the opinion that there have been no significant events which have occurred since 30 June 2013 to the date of this report that are likely to have a material effect on the B&B Group's financial position as disclosed in this Interim Financial Report.


Section B - B&B

Page 41 of 75



30 June 2013

Notes to the Financial Information (continued) The financial information in this document is unaudited and does not constitute statutory accounts within the meaning of section 435 of the Companies Act 2006. The comparative figures for the financial year ended 31 December 2012 are not the statutory accounts for that financial year for Bradford & Bingley plc. The 2012 statutory accounts of Bradford & Bingley plc have been reported on by that company's auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified, 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 contain a statement under section 498(2) or (3) of the Companies Act 2006. This document may contain forward-looking statements with respect to certain plans and current goals and expectations relating to the future financial conditions, business performance and results of Bradford & Bingley plc. By their nature, all forwardlooking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Bradford & Bingley plc including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuation in interest rates and exchange rates, inflation, deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Bradford & Bingley plc and its affiliates operate. As a result, the actual future financial condition, business performance and results of Bradford & Bingley plc may differ materially from the plans, goals and expectations expressed or implied in these forwardlooking statements.


Section B - B&B

Page 42 of 75



30 June 2013

Statement of Directors' Responsibilities The Directors confirm that this Interim Financial Report has been prepared in accordance with IAS 34 as adopted by the European Union and that the management commentary and related notes includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:  

An indication of important events that have occurred during the first six months and their impact on the condensed Financial Statements and a description of the principal risks and uncertainties for the remaining nine months of the financial period; and Material related party transactions in the first six months and any material changes in the related party transactions described in the last annual report.

The Directors of Bradford & Bingley plc at the date of this report are: Richard Pym Kent Atkinson Richard Banks Michael Buckley Sue Langley Phillip McLelland Keith Morgan Jim O'Neil Louise Patten John Tattersall On behalf of the Board

Richard Banks Chief Executive Officer 5 August 2013

Phillip McLelland Finance Director 5 August 2013

Bradford & Bingley plc, Registered Office: Croft Road, Crossflatts, Bingley, West Yorkshire BD16 2UA. Registered in England and Wales under company number 03938288.


Section B - B&B

Page 43 of 75



30 June 2013

Independent Review Report to Bradford & Bingley plc Introduction We have been engaged by the company to review the condensed set of Financial Statements in the Interim Financial Report for the six months ended 30 June 2013, which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity, Consolidated Cash Flow Statement and the related notes. We have read the other information contained in the Interim Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of Financial Statements. Directors' responsibilities The Interim Financial Report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Interim Financial Report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority. As disclosed in note 2, the Annual Financial Statements of the B&B Group are prepared in accordance with IFRS as adopted by the European Union. The condensed set of Financial Statements included in this Interim Financial Report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union. Our responsibility Our responsibility is to express to the company a conclusion on the condensed set of Financial Statements in the Interim Financial Report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Disclosure and Transparency Rules of the Financial Conduct Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity', issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland), and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based 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 Report for the six months ended 30 June 2013 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

PricewaterhouseCoopers LLP Chartered Accountants Bristol 5 August 2013

The maintenance and integrity of the Bradford & Bingley plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Financial Statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.


Section B - B&B

Page 44 of 75

Northern Rock (Asset Management) plc


30 June 2013

Section C Northern Rock (Asset Management) plc Interim Financial Report for the 6 months ended 30 June 2013


Section C - NRAM

Page 45 of 75



30 June 2013

Northern Rock (Asset Management) plc Interim Financial Report for the 6 months ended 30 June 2013 KEY HIGHLIGHTS Northern Rock (Asset Management) plc  Repaid a further £721m in Government loans, reducing the total owed to the Government to £17.3bn.  £312m paid to Government in the form of interest, fees and corporation tax.  Mortgage accounts three or more months in arrears fell by 18% to 16,186 (H1 2012: 23,158; FY 2012: 19,667) from the year end.  Underlying profit before tax of £386.5m, compared with £415.1m profit in H1 2012.  Statutory profit before tax of £343.2m, compared with £305.3m profit in H1 2012. Events since 30 June 2013:  Announced the £400m sale of NRAM's standalone unsecured personal loan book, realising a profit on disposal of £21m, which will generate a further repayment of the Government loan in the third quarter of 2013.

PERFORMANCE ON STRATEGIC PRIORITIES 1. Optimise the Balance Sheet NRAM's Balance Sheet has reduced to £45.3bn in the last six months, a decrease of £3.3bn. NRAM has repaid £721m of Government funding in the first half of this year (H1 2012: £88m; FY 2012: £1,674m). A further £2.6bn of other funding has been repaid. These repayments have been funded largely from a 5% reduction in lending balances (£1.8bn since 31 December 2012). As a result, lending balances stand at £34.4bn at 30 June 2013 (H1 2012: £38.9bn; FY 2012: £36.3bn). Other cash flows were generated for the Government in the first half of the year in the form of guarantee fees, interest and taxes, totalling £312m (H1 2012: £140m; FY 2012: £372m). The Board considers the total of all these cash flows paid to HM Treasury to be an important measure of NRAM meeting its objective in terms of maximising taxpayer value. Events since 30 June 2013 In July 2013, after the close of the interim financial period and, therefore, not included in the June Balance Sheet, NRAM completed the £400m sale of its standalone unsecured personal loan book, realising a profit on disposal of £21m. The sale proceeds will be used to repay a further element of the NRAM Government loan in the third quarter of 2013. 2. Debt Management The number of accounts in arrears for NRAM is lower than the 2012 year end as a direct consequence of proactive arrears management coupled with the continued low interest rate environment. The total number of mortgage cases three or more months in arrears, including those in possession, reduced by 18% since the end of 2012 to 16,186 cases as at 30 June 2013 (H1 2012: 23,158; FY 2012: 19,667). The total amount of arrears owed by residential customers has fallen by £19.0m to £132.1m during the six months to 30 June 2013, a reduction of 13%. Support for customers experiencing payment difficulties NRAM has a total of around 388,000 customers: they have 292,000 mortgage accounts and 212,000 unsecured personal loan accounts. The majority, 89%, of these mortgage loans continue to perform well but we do have a significant number of customers who are finding it difficult to meet their repayments. In those cases, we work closely with customers to offer a range of solutions to help them manage their circumstances. During the first half of 2013, 31,300 arrangements were successfully completed and approximately 800 account modifications were made (H1 2012: 1,600; FY 2012: 3,300) to assist customers with their repayments and continue their existing mortgage.


Section C - NRAM

Page 46 of 75



30 June 2013

We also work with a range of non-fee charging debt advice agencies to help customers reorganise their finances and ensure, wherever possible, that they can continue as homeowners. Research conducted by YouGov and the Money Advice Service shows that individuals who seek advice are twice as likely to have their debt become manageable within 12 months compared to those who do not. The number of NRAM customers referred to debt advice agencies in the first half of 2013 was 2,264 (H1 2012: 2,231; FY 2012: 5,587). Repossession proceedings for customers in arrears are always viewed as a last resort but regrettably, in some situations, this is inevitable. During the first half, the number of accounts taken into possession reduced by 17% to 2,598 (H1 2012: 3,120). The stock of properties in possession at the end of June decreased from 1,488 at 31 December 2012 to 1,423 (H1 2012: 1,947). 3. Customers and Conduct It is a key objective for UKAR to work with customers to achieve the most appropriate outcome for their particular situation. In addition to our reactive and proactive customer contact strategies for customers in financial difficulty, a further area of focus for UKAR is whether our interest only customers have plans in place to repay their mortgage at the end of their term. During the first half of 2013, we have proactively written to or called a sample of interest only customers, with mortgage terms of ten years or less remaining. This activity is designed to ensure customers are aware of the need to plan for the repayment of the loan at the end of its term and to encourage them to share details of their plans so we can help ensure they are robust. We have had an excellent response to the campaign so far. Since the creation of UKAR we have been remediating a series of problems of process and procedure inherited from the legacy NRAM business. The most significant of these have been the mis-selling of Payment Protection Insurance by Northern Rock. During the first half of 2013, levels of PPI claims have reduced and, at the present time, no further provision is required. A further issue we have previously reported is in respect of non compliant Consumer Credit Act (CCA) loans. Following the discovery of this issue UKAR's Board commissioned an independent external review, by Deloitte, in order to understand what went wrong in implementing the updated CCA regulations. Deloitte concluded that the defects in CCA regulated loan letters and statements were created in 2008 before UKAR was established and were not known by or escalated to senior management, or the Boards of NRAM or UKAR, prior to 2012. Deloitte's summary of their report was published on UKAR's website on 15 July 2013. UKAR’s Board has accepted Deloitte’s recommendation to strengthen some controls. In 2012 we provided £271m for remediating non-compliant CCA loans and we have now contacted and corrected the accounts of 120,000 customers. During the course of our investigations we identified certain accounts sold by Northern Rock prior to nationalisation which are subject to the same problem. Remediation of these accounts has been the primary driver of incurring an additional £47m of remediation costs. In addition, there was a net release of £2m in respect of provisions for other remediation activities. We continue to monitor all accounts to ensure the appropriate outcomes for customers. Should we find something wrong we will ensure the issues are corrected quickly and affected customers are remediated where required. 4. Reduce Costs The Group has continued to focus on reducing costs. Ongoing administrative expenses for the period were lower at £55.8m (H1 2012: £59.6m; FY 2012: £113.9m) with the ratio of costs to assets increasing marginally to 0.26% (H1 2012: 0.25%; FY 2012: 0.24%). We completed the exit from our Gosforth site in Newcastle at the end of June 2013. This closure, as announced previously, will allow us to concentrate on the operations in our remaining two sites in the North East and West Yorkshire which will improve efficiency and reduce costs. The premises in Gosforth and two other non-core properties were sold in 2012. OTHER INFORMATION Northern Rock (Asset Management) plc Northern Rock was nationalised and taken into Government ownership in February 2008 and was then restructured into two legal entities with effect from 1 January 2010 - Northern Rock plc and Northern Rock (Asset Management) plc. NRAM retained the majority of the pre-existing mortgage book and all pre-existing unsecured loan accounts. NRAM is permanently closed to new lending, but continues to provide services to some 388,000 existing borrowers, with 292,000 mortgage accounts and 212,000 unsecured loan accounts. UKAR Interim Financial Report 30 June 2013

Section C - NRAM

Page 47 of 75



30 June 2013

Key Performance Indicators ('KPIs') In addition to the primary Financial Statements, NRAM has adopted the following KPIs in managing business performance in the context of its strategic priorities. Strategic priorities



Financial measures



Commentary

Total lending balances £bn Secured £bn Unsecured £bn Held for sale £bn

34.4 32.7 1.4 0.3

38.9 36.6 2.3 -

36.3 34.4 1.9 -

Lending balances reduced by 5% during H1 mainly due to £1.3bn of residential redemptions. NRAM's standalone unsecured personal loan book was sold in July 2013, and hence is shown at 30 June 2013 as 'held for sale'. In 2012, unsecured balances include both the Together and standalone unsecured loan books.


8.0 1.3

9.2 1.8

8.4 3.2

Redemptions are consistent with H2 2012 but have fallen relative to H1 2012, which was impacted by an early repayment charge ('ERC') waiver.


0.7 17.3

0.1 19.6

1.7 18.1

NRAM repaid £721m of the Government Loan in H1, in addition to £2.8bn of other funding maturities.


1.03

0.23

2.05

Total cash paid to HM Treasury during the period. This includes principal and interest repayments, guarantee fees and tax paid. The main driver of the increase year on year is higher principal repayments on the Government loan.

0.41 132.1

0.48 172.7

0.44 151.1


Residential arrears 3 months and over and possessions as % of the book: - by value - by number of accounts Number of residential arrears 3 months and over and possessions cases Impairment provisions; Residential secured £m Cover % Unsecured £m Cover %: Commercial £m Cover % Reduce costs


Total costs £m Ongoing costs £m* Ratio of costs to average interest-earning assets - statutory % - ongoing %*

7.23 5.54

8.96 7.17

8.18 6.44

16,186

23,158

19,667

722.0 2.17 249.1 15.05 33.3 13.88

854.7 2.30 483.3 17.51 54.4 17.52

773.5 2.22 403.8 17.56 49.7 18.07

55.8 55.8

59.6 59.6

149.6 113.9

0.26 0.26

0.25 0.25

0.32 0.24

The first of these measures what proportion of the book is non-performing, related to the total balance of all residential mortgages, and the second the value of customers’ missed payments. The reduction in both KPIs is a reflection of improving arrears performance. The reduction in arrears reflects both the improvement in collections performance and the continuing benefit to mortgage customers of lower interest rates.

The level of the residential impairment Balance Sheet provision reduced by £51.5m from 31 December 2012 and the level of cover decreased from 2.22% to 2.17%.

Ongoing administrative expenses were £3.8m (6%) lower than H1 2012. As the balance sheet has continued to decrease this has resulted in a small increase in cost asset ratios.

* Ongoing costs exclude certain items that are not expected to recur on an ongoing basis; an analysis of items excluded from ongoing costs is provided in note 7.


Section C - NRAM

Page 48 of 75



30 June 2013

Business review In addition to the statutory measure of profit, the Board believes it is appropriate to assess performance based on the underlying profit of the business, which excludes non-recurring costs, particularly those associated with the integration with B&B, and certain gains such as the repurchase of own liabilities. Also excluded are movements in fair value and hedge ineffectiveness relating to financial instruments which are expected to be held to maturity as opposed to being traded. An analysis of the difference between the statutory accounting measure of profit and the underlying profit of the NRAM Group is provided in the table below.

Summary Income Statement 6 months to 30 June 2013 £m



542.6 (10.2) 532.4 (55.8) (84.7) (5.4) 386.5 7.3 (5.6) (45.0) 343.2

584.3 28.5 612.8 (59.6) (127.1) (11.0) 415.1 (31.1) (13.7) (65.0) 305.3

1,161.7 11.2 1,172.9 (113.9) (179.3) (3.7) 876.0 (36.2) (19.0) (35.7) (407.0) 115.9 494.0

Net interest income Underlying net non-interest income* Underlying net operating income Ongoing administrative expenses Impairment on loans to customers Net impairment on investment securities Underlying profit before taxation Unrealised fair value movements on financial instruments Hedge ineffectiveness Other net administrative expenses Provision for customer redress Gain on repurchase of own liabilities Statutory profit before taxation *

Underlying net non-interest income includes net fee and commission income, net gains on financial instruments designated at fair value, net realised gains less losses on investment securities and other operating income.

Summary Balance Sheet 30 June 2013 £m

30 June 2012 £m


Loans to customers: - Residential mortgages - Commercial and other secured loans - Unsecured lending - Held for sale Wholesale assets Fair value adjustments on portfolio hedging Derivative financial instruments Other assets Total assets

32,516.1 206.7 1,405.7 312.1 6,357.4 120.4 4,284.2 89.3 45,291.9

36,353.1 256.1 2,276.9 7,823.4 174.8 4,242.7 116.4 51,243.4

34,145.0 225.4 1,895.4 8,192.8 152.5 3,919.8 79.2 48,610.1

HM Treasury loans Wholesale funding Derivative financial instruments Other liabilities Capital instruments Equity Total equity and liabilities

17,340.8 24,309.5 236.2 394.8 62.0 2,948.6 45,291.9

19,650.6 28,163.5 302.9 389.5 219.2 2,517.7 51,243.4

18,063.1 26,991.3 281.5 363.9 213.0 2,697.3 48,610.1

At


Section C - NRAM

Page 49 of 75



30 June 2013

Northern Rock (Asset Management) plc Condensed Financial Statements Consolidated Income Statement 6 months to 30 June 2013



£m

£m

£m

764.3 (221.7) 542.6

872.6 (288.3) 584.3

1,709.5 (547.8) 1,161.7

5.9 (6.0) (0.1)

9.4 (6.2) 3.2

15.0 (12.3) 2.7

(10.3) 7.3 (5.6) (45.0) 0.2 (53.5)

17.5 1.2 (31.1) (13.7) (65.0) 6.6 (81.3)

17.5 (16.3) (36.2) (19.0) (407.0) 7.3 (451.0)

489.1

503.0

710.7

7 7 10

(55.8) (84.7) (5.4) 343.2

(59.6) (127.1) (11.0) 305.3

(113.9) (35.7) (179.3) (3.7) 115.9 494.0

8

(80.0)

(68.5)

(82.7)

263.2

236.8

411.3

Note Interest receivable and similar income Interest expense and similar charges Net interest income

3 3 3

Fee and commission income Fee and commission expense Net fee and commission income Net gains on financial instruments designated at fair value Net realised gains less losses on investment securities Unrealised fair value movements on financial instruments Hedge ineffectiveness Provision for customer redress Other operating income Non-interest income

5 6 6 14 4

Net operating income Administrative expenses: - Ongoing - Other net expenses Impairment on loans to customers Net impairment on investment securities Gain on repurchase of own liabilities Profit before taxation Taxation Profit for the financial period

The NRAM Group's business and operations comprise one single activity, principally within the United Kingdom, and it has only one operating segment for the purposes of IFRS 8 'Operating Segments'. The results above arise from continuing activities, and are attributable to the equity shareholder.


Section C - NRAM

Page 50 of 75



30 June 2013

Northern Rock (Asset Management) plc Condensed Financial Statements (continued) Consolidated Statement of Comprehensive Income 6 months to 30 June 2013


Gross of tax £m

Tax £m

Net of tax £m

343.2

(80.0)

263.2

31.1 (7.0)

(7.2) 1.6

23.9 (5.4)

798.1 (831.0)

(303.2) 315.7

494.9 (515.3)

(8.8)

6.9

(1.9)

(13.0) (13.0)

3.0 3.0

(10.0) (10.0)

(21.8) 321.4

9.9 (70.1)

(11.9) 251.3

Gross of tax £m

Tax £m

Net of tax £m

Other comprehensive income Items that may be reclassified subsequently to profit or loss: Available-for-sale instruments: - Net gains recognised in available-for-sale reserve during the period - Amounts transferred from available-for-sale reserve and recognised in profit during the period Cash flow hedges: - Net gains recognised in cash flow hedge reserve during the period - Amounts transferred from cash flow hedge reserve and recognised in profit during the period Items that will not be reclassified subsequently to profit or loss: Actuarial losses on retirement benefit obligations




305.3

(68.5)

236.8

36.5 5.6

(8.9) (1.4)

27.6 4.2

Other comprehensive income Items that may be reclassified subsequently to profit or loss: Available-for-sale instruments: - Net gains recognised in available-for-sale reserve during the period - Amounts transferred from available-for-sale reserve and recognised in profit during the period Cash flow hedges: - Net losses recognised in cash flow hedge reserve during the period - Amounts transferred from cash flow hedge reserve and recognised in profit during the period Items that will not be reclassified subsequently to profit or loss: Actuarial gains on retirement benefit obligations



(698.2) 745.2

332.8 (355.2)

(365.4) 390.0

89.1

(32.7)

56.4

0.2 0.2

0.6 0.6

0.8 0.8

89.3 394.6

Section C - NRAM

(32.1) (100.6)

57.2 294.0

Page 51 of 75



30 June 2013

Northern Rock (Asset Management) plc Condensed Financial Statements (continued) Consolidated Statement of Comprehensive Income (continued) 12 months to 31 December 2012

Profit for the financial year

Gross of tax £m

Tax £m

Net of tax £m

494.0

(82.7)

411.3

66.9 0.5

(16.4) (0.1)

50.5 0.4

(901.4) 965.5

492.2 (527.2)

(409.2) 438.3

131.5

(51.5)

80.0

(22.9) (22.9)

5.3 5.3

(17.6) (17.6)

Other comprehensive income Items that may be reclassified subsequently to profit or loss: Available-for-sale instruments: - Net gains recognised in available-for-sale reserve during the year - Amounts transferred from available-for-sale reserve and recognised in profit during the year Cash flow hedges: - Net losses recognised in cash flow hedge reserve during the year - Amounts transferred from cash flow hedge reserve and recognised in profit during the year Items that will not be reclassified subsequently to profit or loss: Actuarial losses on retirement benefit obligations

Total other comprehensive income Total comprehensive income for the financial year


108.6 602.6

Section C - NRAM

(46.2) (128.9)

62.4 473.7

Page 52 of 75



30 June 2013

Northern Rock (Asset Management) plc Condensed Financial Statements (continued) Consolidated Balance Sheet

At

Note 30 June 2013 £m

30 June 2012 £m


Assets Balances with the Bank of England Cash at bank and in hand Investment securities Loans to customers Assets classified as held for sale: loans to customers Fair value adjustments on portfolio hedging Derivative financial instruments Other assets Retirement benefit assets Property, plant and equipment Intangible assets Total assets

9 21 9

4,050.0 1,061.7 1,245.7 34,128.5 312.1 120.4 4,284.2 19.4 65.4 3.6 0.9 45,291.9

4,611.1 1,361.7 1,850.6 38,886.1 174.8 4,242.7 37.0 65.4 12.8 1.2 51,243.4

4,758.5 1,877.1 1,557.2 36,265.8 152.5 3,919.8 31.2 43.0 3.9 1.1 48,610.1

2,871.6 17,340.8 236.2 21,437.9 86.7 102.7 33.4 172.0 62.0 42,343.3

2,821.9 19,650.6 302.9 25,341.6 91.9 116.3 41.8 139.5 219.2 48,725.7

3,573.7 18,063.1 281.5 23,417.6 117.3 45.9 45.9 154.8 213.0 45,912.8

124.0 491.8 2,208.0 2,823.8

124.0 470.1 1,798.8 2,392.9

124.0 493.7 1,954.8 2,572.5

124.8

124.8

124.8

2,948.6

2,517.7

2,697.3

45,291.9

51,243.4

48,610.1

Liabilities Amounts due to banks HM Treasury loans Derivative financial instruments Debt securities in issue Other liabilities Current tax liabilities Deferred tax liabilities Provisions Capital instruments Total liabilities

13

8 14

Equity Issued capital and reserves attributable to equity holder of the parent: - Share capital - Reserves - Retained earnings Share capital and reserves

15

Non-shareholders' funds Total equity Total equity and liabilities


Section C - NRAM

Page 53 of 75



30 June 2013

Northern Rock (Asset Management) plc Condensed Financial Statements (continued) Consolidated Statement of Changes in Equity


Share Share premium capital reserve £m £m

At 1 January 2013

124.0

Other comprehensive income: - Net movement in availablefor-sale reserve - Net movement in cash flow hedge reserve - Actuarial losses - Tax effects of the above Total other comprehensive income Profit for the financial period Total comprehensive income At 30 June 2013

403.2

1,954.8

2,572.5

124.8

2,697.3

24.1

-

24.1

-

24.1

-

-

-

(32.9)

-

(32.9)

-

(32.9)

-

-

-

6.9 (1.9)

(13.0) 3.0 (10.0)

(13.0) 9.9 (11.9)

-

(13.0) 9.9 (11.9)

7.3

263.2 (1.9) 253.2 81.3 2,208.0

403.2

At 1 January 2012

124.0

403.2


7.3

Other reserves £m

3.2


1,560.9

263.2 251.3 2,823.8

124.8

263.2 251.3 2,948.6


Non shareholders' funds £m

Total equity £m

2,098.6

125.7

2,224.3

-

-

-

42.1

-

42.1

-

42.1

-

-

-

47.0

-

47.0

-

47.0

-

-

-

(32.7) 56.4

0.2 (32.1) 57.2

-

0.2 (32.1) 57.2

-

-

-

-

236.8

236.8

-

236.8

-

-

-

56.4 -

237.6 0.3

294.0 0.3

7.3

59.6

1,798.8

2,392.9

124.0


83.2

Total equity £m

-


At 30 June 2012

7.3

Nonshareholders' funds £m

-

Share Share premium capital reserve £m £m

Total comprehensive income Gain on repurchase of equity

Other Retained reserves earnings £m £m


-

124.0

Other comprehensive income: - Net movement in availablefor-sale reserve - Net movement in cash flow hedge reserve - Actuarial gains - Tax effects of the above Total other comprehensive income Profit for the financial period


403.2

Section C - NRAM

0.2 0.6 0.8

(0.9) 124.8

Page 54 of 75

294.0 (0.6) 2,517.7



30 June 2013

Northern Rock (Asset Management) plc Condensed Financial Statements (continued) Consolidated Statement of Changes in Equity (continued)


Share capital £m

At 1 January 2012

124.0

403.2

-

-

-

67.4

-

67.4

-

67.4

-

-

-

64.1

-

64.1

-

64.1

-

-

-

(51.5) 80.0

(22.9) 5.3 (17.6)

(22.9) (46.2) 62.4

-

(22.9) (46.2) 62.4

124.0

403.2

Other comprehensive income: - Net movement in availablefor-sale reserve - Net movement in cash flow hedge reserve - Actuarial losses - Tax effects of the above Total other comprehensive income Profit for the financial year Total comprehensive income Gain on repurchase of equity At 31 December 2012



Other reserves £m

7.3

3.2

Nonshareholders' funds £m

Share premium reserve £m

7.3

Section C - NRAM

80.0 83.2


1,560.9

411.3 393.7 0.2 1,954.8


2,098.6

411.3 473.7 0.2 2,572.5

125.7

(0.9) 124.8

Page 55 of 75

Total equity £m

2,224.3

411.3 473.7 (0.7) 2,697.3



30 June 2013

Northern Rock (Asset Management) plc Condensed Financial Statements (continued) Consolidated Cash Flow Statement

Cash flows from operating activities Profit before taxation for the financial period Adjustments to reconcile profit to cash flows generated from/(used in) operating activities: - Provision for customer redress - Depreciation and amortisation - Net loss on sale of property, plant and equipment - Impairment on loans to customers - Net impairment on investment securities - Gain on repurchase of own liabilities - Income taxes paid - Fair value adjustments on financial instruments - Other non-cash movements Cash flows generated from/(used in) operating activities before changes in operating assets and liabilities Net (increase)/decrease in operating assets: - Cash at bank - Loans to customers - Sale of loans to customers - Derivative financial instruments receivable - Other assets Net increase/(decrease) in operating liabilities: - Amounts due to banks - Derivative financial instruments payable - Debt securities in issue - Other liabilities - Provisions Net cash (used in)/generated from operating activities Cash flows from investing activities - Proceeds from sale of property, plant and equipment and investment property - Purchase of investment securities - Proceeds from sale and redemption of investment securities Net cash from investing activities Cash flows used in financing activities - Repayment of HM Treasury loans - Repurchase of own liabilities and equity Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period




343.2

305.3

494.0

45.0 0.4 84.7 5.4 (25.7) (38.9) 677.9

65.0 1.0 0.2 127.1 11.0 (61.0) (22.4) (476.1)

407.0 9.9 0.4 179.3 3.7 (115.9) (153.5) (84.4) (634.9)

(49.9)

105.6

6.0 1,739.7 (364.4) 12.3

2,200.0 808.4 (0.1)

4,072.1 465.0 1,131.3 9.1

(702.6) (45.3) (2,566.8) (86.0) (38.8) (953.9)

(859.7) (84.6) (2,737.9) (3.5) (92.8) (820.1)

(107.6) (106.0) (4,005.2) 60.5 (189.5) 1,435.3

306.8 306.8

38.0 (27.5) 233.4 243.9

40.7 (74.3) 597.7 564.1

(871.5) (871.5)

(87.5) (0.8) (88.3)

(1,673.8) (338.2) (2,012.0)

(1,518.6) 6,628.5

(664.5) 6,641.1

(12.6) 6,641.1

5,109.9

5,976.6

6,628.5

4,048.3 1,061.6 5,109.9

4,609.2 1,356.4 11.0 5,976.6

4,756.5 1,871.0 1.0 6,628.5

1,092.0

Represented by cash and assets with original maturity of three months or less within: - Balances with the Bank of England - Cash at bank and in hand - Investment securities Total


Section C - NRAM

Page 56 of 75



30 June 2013

Notes to the Financial Information 1. Reporting entity Northern Rock (Asset Management) plc ('NRAM') is a public limited company incorporated and domiciled in the United Kingdom. The financial information in this Interim Financial Report consolidates NRAM and its subsidiaries (including special purpose vehicles ('SPVs')), together referred to as the NRAM Group. NRAM's Consolidated Financial Statements for the year ended 31 December 2012 are included in NRAM's 2012 Annual Report & Accounts available on NRAM's website www.nram.co.uk. As explained in NRAM's 2012 Annual Report & Accounts, NRAM's accounting reference date has been changed from 31 December to 31 March. NRAM's next Annual Report & Accounts will cover the 15 months to 31 March 2014. Prior to that an Interim Financial Report will be published for the period to 30 September 2013. On 10 April 2013 NRAM moved its registered office to that of its parent UKAR.

2. Basis of preparation This Interim Financial Report has been prepared on a going concern basis. At the date of approval of this Interim Financial Report, NRAM is reliant on the financing facilities and also upon the guarantee arrangements provided to NRAM by HM Treasury. Withdrawal of the financing facilities or the guarantee arrangements would have a significant impact on NRAM's operations and its ability to continue as a going concern, in which case adjustments may have to be made to reduce the carrying value of assets to recoverable amounts and to provide for further liabilities that might arise. At the date of approval of this Interim Financial Report, HM Treasury has confirmed its intentions to continue to provide funding until at least 1 November 2014. In preparing this Interim Financial Report, including the 2012 comparative financial information where applicable, the NRAM Group has adopted for the first time the following statements: - IFRS 13 ‘Fair Value Measurement’. This statement is mandatory for 2013 financial statements, with 2012 comparative information. This standard sets out principles for how to measure the fair value of financial assets and liabilities. It does not change which items are carried at fair value. IFRS 13 has not had any material impact on the NRAM Group's fair values. IFRS 13 also requires that Interim Financial Reports from 2013 should include some additional fair value disclosures; these are included in note 17. - The June 2011 amendments to IAS 1 ‘Presentation of Financial Statements’ relating to ‘Presentation of Items of Other Comprehensive Income’. This statement is mandatory for 2013 financial statements, with 2012 comparative information. As a result, the NRAM Group's Statement of Comprehensive Income now shows which elements of other comprehensive income may be reclassified subsequently to profit or loss. - The June 2011 amendments to IAS 19 ‘Employee Benefits’. This statement is mandatory for 2013 financial statements, with 2012 comparative information. This was applied in calculating the 2013 cost of the defined benefit pension scheme, and in the calculation of defined benefit scheme assets and obligations as at 30 June 2013. - The Annual Improvements to IFRSs 2009-2011 Cycle, issued in May 2012. These changes are mandatory for 2013 financial statements, with 2012 comparative information. These changes had no material impact on the NRAM Group. There have been no other material changes to the accounting policies previously applied by the NRAM Group in preparing, and detailed in, its Annual Report & Accounts for the year ended 31 December 2012, which were prepared in accordance with IFRS as adopted by the European Union. The Directors consider that the NRAM Group's accounting policies are the most appropriate to its circumstances, have been consistently applied in dealing with items which are considered material, and are supported by reasonable and prudent estimates and judgements. The preparation of this Interim Financial Report requires the use of estimates and assumptions that affect the reported values of assets and liabilities at the Balance Sheet date and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. This Interim Financial Report has been prepared in accordance with IAS 34 'Interim Financial Reporting'. The information in this document does not include all of the disclosures required by IFRS in full annual financial statements, and it should be read in conjunction with the Consolidated Financial Statements of NRAM for the year ended 31 December 2012.


Section C - NRAM

Page 57 of 75



30 June 2013

Notes to the Financial Information (continued) 3. Net interest income 6 months to 30 June 2013 £m



Interest receivable and similar income On secured loans On other lending On investment securities and deposits

711.2 31.0 22.1

786.6 55.3 30.7

1,541.4 111.2 56.9

Total interest receivable and similar income

764.3

872.6

1,709.5

Interest expense and similar charges On amounts due to banks and HM Treasury On debt securities and other

(137.4) (84.3)

(103.7) (184.6)

(250.1) (297.7)

Total interest expense and similar charges Net interest income

(221.7) 542.6

(288.3) 584.3

(547.8) 1,161.7

43,171

48,465

47,280

39,925 3,246

45,605 2,860

44,262 3,018

Average balances Interest-earning assets ('IEA') Financed by: - Interest-bearing funding - Interest-free funding* Average rates - Gross yield on IEA - Cost of interest-bearing funding Interest spread Contribution of interest-free funding* Net interest margin on average IEA Average Bank Base Rate Average 1-month LIBOR Average 3-month LIBOR *

% 3.57 (1.12) 2.45 0.08 2.53

% 3.62 (1.27) 2.35 0.07 2.42

% 3.62 (1.24) 2.38 0.08 2.46

0.50 0.49 0.51

0.50 0.71 1.03

0.50 0.62 0.83

Interest-free funding is calculated as an average over the financial period, and includes share capital and reserves.


Section C - NRAM

Page 58 of 75



30 June 2013

Notes to the Financial Information (continued) 4. Net non-interest income

Total net fee and commission income Net gains on financial instruments designated at fair value Net realised gains less losses on investment securities Other operating income Underlying net non-interest income Unrealised fair value movements on financial instruments




(0.1) -

3.2 17.5

2.7 17.5

(10.3)

1.2

(16.3)

0.2

6.6

7.3

(10.2)

28.5

11.2

7.3

(31.1)

(36.2)

(5.6)

(13.7)

(19.0)

Provision for customer redress

(45.0)

(65.0)

(407.0)

Statutory net non-interest income

(53.5)

(81.3)

(451.0)

Hedge ineffectiveness

5. Net gains on financial instruments designated at fair value The gains of £17.5m in 2012 arose on the disposal of assets which had previously been held at a fair value of £nil on the Balance Sheet.

6. Unrealised fair value movements on financial instruments and hedge ineffectiveness 6 months to 30 June 2013 £m Net (loss)/gain in fair value: - translation losses on underlying instruments - fair value movements on derivatives which are economic hedges but are not in hedge accounting relationships Unrealised fair value movements Net gains on fair value hedging instruments Net (losses)/gains on fair value hedged items attributable to hedged risk Ineffectiveness on cash flow hedges Net hedge ineffectiveness losses Total


Section C - NRAM



(171.6)

(179.8)

(291.9)

178.9 7.3

148.7 (31.1)

255.7 (36.2)

35.2 (37.3) (3.5) (5.6)

63.2 20.9 (97.8) (13.7)

83.8 (82.8) (20.0) (19.0)

1.7

(44.8)

(55.2)

Page 59 of 75



30 June 2013

Notes to the Financial Information (continued) 7. Administrative expenses NRAM had no employees during the periods presented, as services were provided to NRAM by employees of B&B. Employee costs recharged by B&B are included within total staff costs and these employees are included in the table below. The monthly average number of persons recharged by B&B during the period was as follows:

Average headcount: Full time Part time Total providing services to NRAM Total average full time equivalent providing services to NRAM



12 months to 31 December 2012 Number

940 285 1,225 1,126

1,072 358 1,430 1,295

1,017 342 1,359 1,234

30 June 2012 Number 1,062 345 1,407 1,281

31 December 2012 Number 839 319 1,158 1,046

The number of persons recharged by B&B at the end of the period was as follows: 30 June 2013 Number 848 236 1,084 1,005

At Full time Part time Total providing services to NRAM Total full time equivalent headcount providing services to NRAM

The full time equivalent is based on the average hours worked by employees in the period. Staff numbers include Executive but not Non-Executive Directors. In addition to the permanent staff above, NRAM employed a full-time equivalent of 33 temporary staff and specialist contractors at 30 June 2013 (30 June 2012: 112; 31 December 2012: 155). 6 months to 30 June 2013 £m



NRAM's costs of recharged B&B employees were as follows: Wages and salaries Social security costs Defined benefit pension costs Defined contribution pension costs Total staff costs IT costs Outsourced and professional services Depreciation and amortisation Other administrative expenses Ongoing administrative expenses

17.0 1.6 (1.1) 0.6 18.1 16.2 5.5 4.5 11.5 55.8

20.6 1.5 (0.2) 0.9 22.8 19.3 5.3 4.2 8.0 59.6

37.0 3.6 (0.3) 2.0 42.3 30.1 12.1 7.9 21.5 113.9

Other net administrative expenses: - Transformation costs* - Accelerated depreciation Total other net administrative expenses Total

55.8

59.6

27.4 8.3 35.7 149.6

* Transformation costs relate to the separation of NRAM from Northern Rock plc and the NRAM Group's integration into UKAR.


Section C - NRAM

Page 60 of 75



30 June 2013

Notes to the Financial Information (continued) 8. Taxation Taxation appropriately reflects changes in tax rates which had been substantively enacted by 30 June 2013. The tax charge for the period included overseas tax of £nil (2012: £nil). The tax charge for the 6 months to 30 June 2013 has been calculated using the expected effective tax rate for the 15 months to 31 March 2014, ie 23.2% (year ended 31 December 2012: 24.5%). Deferred taxation appropriately reflects a change to the standard rate of UK corporation tax to 23% with effect from 1 April 2013. The announced further rate reductions to 20% with effect from 1 April 2015, which were substantively enacted on 17 July 2013, would have the maximum potential impact of reducing NRAM's deferred tax liabilities by approximately £5.1m. No deferred tax assets were unrecognised at 30 June 2013 (30 June 2012: £16.8m; 31 December 2012: £nil), relating to deductible differences of £nil (30 June 2012: £69.9m; 31 December 2012: £nil).

9. Loans to customers Residential mortgages include all of the NRAM Group’s buy-to-let loans. Commercial loans comprise loans secured on commercial properties. The Together product, previously offered by NRAM, combines a secured and unsecured loan all at one interest rate and with flexible payments. Outstanding secured balances in respect of this product are included within total residential mortgages while outstanding unsecured balances are included within unsecured loans. All of the NRAM Group's loans to customers are to UK customers. Balances include accounting adjustments in respect of provisioning requirements. Loans to customers include loans amounting to £25,423.7m (30 June 2012: £28,792.8m; 31 December 2012: £26,933.3m) which have been sold to bankruptcy remote SPVs whereby substantially all of the risks and rewards of the portfolio are retained by NRAM. Accordingly, all of these loans are retained on NRAM's Balance Sheet. Further details are provided in note 13. Fair value adjustments on portfolio hedging amounting to £120.4m (30 June 2012: £174.8m; 31 December 2012: £152.5m) relate to fair value adjustments to loans to customers in relation to interest rate risk as a result of their inclusion in a fair value portfolio hedge relationship. Loans to customers comprise the following product types: Balances At 30 June 2013 £m

%

Residential mortgages Buy-to-let Together Standard and other Total residential mortgages

3,698.7 12,633.3 16,184.1 32,516.1

11 39 50 100

Residential loans Commercial loans Total secured loans Unsecured loans Total

32,516.1 206.7 32,722.8 1,405.7 34,128.5

95 1 96 4 100



At 30 June 2012 £m

%


(106.2) (450.8) (784.0) (1,341.0)

4,138.2 13,693.0 18,521.9 36,353.1

11 38 51 100

(97.9) (449.5) (1,211.7) (1,759.1)

(1,341.0) (19.1) (1,360.1) (29.6) (1,389.7)

36,353.1 256.1 36,609.2 2,276.9 38,886.1

93 1 94 6 100

(1,759.1) (8.9) (1,768.0) (123.0) (1,891.0)

Section C - NRAM

Balances

Page 61 of 75



30 June 2013

Notes to the Financial Information (continued) 9. Loans to customers (continued) Balances

Redemptions

At 31 December 2012 £m

%


Residential mortgages Buy-to-let Together Standard and other Total residential mortgages

3,849.1 13,185.8 17,110.1 34,145.0

11 39 50 100

(197.1) (884.9) (2,139.8) (3,221.8)

Residential loans Commercial loans Total secured loans Unsecured loans Total

34,145.0 225.4 34,370.4 1,895.4 36,265.8

94 1 95 5 100

(3,221.8) (24.9) (3,246.7) (231.9) (3,478.6)

Redemptions comprise full redemptions and voluntary partial redemptions, but exclude overpayments and regular monthly payments. On 23 July 2012 NRAM announced the sale of £465m of loans to customers, at par, secured on residential property, to Virgin Money. These sold loans are excluded from the 2012 redemptions disclosed in the above table. As detailed in note 21, in July 2013 NRAM completed the sale of its standalone unsecured personal loan book. These loans have been classified as held for sale and hence are excluded from the balances at 30 June 2013.

10. Impairment on loans to customers Allowances for credit losses against loans and advances to customers have been made as follows:

6 months to 30 June 2013 At 1 January 2013 Movements during the period: - Write-offs - Loan impairment charge - Assets moved to held for sale Net movements during the period At 30 June 2013 The Income Statement charge comprises: - Loan impairment charge - Recoveries net of costs Total Income Statement charge

6 months to 30 June 2012 At 1 January 2012 Movements during the period: - Write-offs - Loan impairment charge Net movements during the period At 30 June 2012 The Income Statement charge comprises: - Loan impairment charge - Recoveries net of costs Total Income Statement charge




On unsecured loans £m

Total £m

773.5

49.7

403.8

1,227.0

(112.8) 61.3 (51.5) 722.0

(14.9) (1.5) (16.4) 33.3

(44.6) 38.2 (148.3) (154.7) 249.1

(172.3) 98.0 (148.3) (222.6) 1,004.4

61.3 (7.4) 53.9

(1.5) (1.0) (2.5)

38.2 (4.9) 33.3

98.0 (13.3) 84.7




Total £m

926.4

49.9

501.6

1,477.9

(150.6) 78.9 (71.7) 854.7

(2.0) 6.5 4.5 54.4

(72.1) 53.8 (18.3) 483.3

(224.7) 139.2 (85.5) 1,392.4

78.9 (4.0) 74.9

6.5 (0.2) 6.3

53.8 (7.9) 45.9

139.2 (12.1) 127.1

Section C - NRAM

Page 62 of 75



30 June 2013

Notes to the Financial Information (continued)

10. Impairment on loans to customers (continued)

12 months to 31 December 2012 At 1 January 2012 Movements during the year: - Write-offs - Loan impairment charge Net movements during the year At 31 December 2012 The Income Statement charge comprises: - Loan impairment charge - Recoveries net of costs Total Income Statement charge




Total £m

926.4

49.9

501.6

1,477.9

(283.0) 130.1 (152.9) 773.5

(14.9) 14.7 (0.2) 49.7

(155.4) 57.6 (97.8) 403.8

(453.3) 202.4 (250.9) 1,227.0

130.1 (7.6) 122.5

14.7 (0.2) 14.5

57.6 (15.3) 42.3

202.4 (23.1) 179.3

In the Balance Sheet the carrying values of loans to customers are presented net of these impairment allowances.

11. Credit quality of loans to customers In respect of loans to residential customers, the NRAM Group holds collateral in the form of mortgages over residential properties. The fair value of this collateral was as follows:

At Neither past due nor impaired Past due but not impaired Impaired Total

30 June 2013 £m 40,034.4 4,229.9 725.5 44,989.8

30 June 2012 £m 44,991.2 5,467.2 882.1 51,340.5

31 December 2012 £m 40,883.1 4,731.4 788.7 46,403.2

If the collateral amount on each individual loan were capped at the amount of the balance outstanding, and any surplus of collateral values over balances outstanding ignored, the fair value of collateral held would be as follows:

At

30 June 2013 £m

30 June 2012 £m


Neither past due nor impaired Past due but not impaired Impaired Total

27,866.5 3,594.3 646.6 32,107.4

30,089.3 4,721.1 806.2 35,616.6

28,739.3 4,089.7 709.5 33,538.5

The impaired balances above include £144.9m (30 June 2012: £170.7m; 31 December 2012: £189.2m) of assets in possession, capped at the balance outstanding. The fair value of the collateral is estimated by taking the most recent valuation of the property and adjusting for house price inflation or deflation up to the Balance Sheet date. The indexed loan to value ('LTV') of residential loan balances, weighted by loan balance, falls into the following ranges:

At To 50% 50% to 75% 75% to 100% Over 100% Total

30 June 2013 % 6.5 12.9 46.2 34.4 100.0

30 June 2012 % 6.4 11.4 42.4 39.8 100.0

31 December 2012 % 6.3 11.6 43.1 39.0 100.0

The average indexed loan to value based on a simple average is 73.9% (30 June 2012: 72.5%; 31 December 2012: 75.3%) and on a weighted average is 90.0% (30 June 2012: 92.1%; 31 December 2012: 91.7%). UKAR Interim Financial Report 30 June 2013

Section C - NRAM

Page 63 of 75



30 June 2013

Notes to the Financial Information (continued) 11. Credit quality of loans to customers (continued)

Residential mortgages £m Neither past due nor impaired Past due but not impaired: - less than 3 months - 3 to 6 months - over 6 months Impaired Impairment allowances Loans to customers net of impairment allowances Impairment allowances: - individual - collective Total impairment allowances


186.0

1,331.2

30,252.3

2,132.3 965.1 674.1 731.5 33,238.1 (722.0) 32,516.1

1.6 52.4 240.0 (33.3) 206.7

141.4 47.4 99.3 35.5 1,654.8 (249.1) 1,405.7

2,275.3 1,012.5 773.4 819.4 35,132.9 (1,004.4) 34,128.5

33.3 33.3

50.4 198.7 249.1

213.3 791.1 1,004.4

129.6 592.4 722.0


Commercial loans £m

At 30 June 2012 Unsecured loans Total £m £m

31,228.5

222.2

2,084.4

33,535.1

2,660.1 1,414.1 930.9 974.2 37,207.8 (854.7) 36,353.1

8.1 80.2 310.5 (54.4) 256.1

212.8 463.0 2,760.2 (483.3) 2,276.9

2,881.0 1,414.1 930.9 1,517.4 40,278.5 (1,392.4) 38,886.1

28.0 26.4 54.4

483.3 483.3

152.2 1,240.2 1,392.4

124.2 730.5 854.7

Residential mortgages £m Neither past due nor impaired Past due but not impaired: - less than 3 months - 3 to 6 months - over 6 months Impaired

At 30 June 2013 Unsecured loans Total £m £m

28,735.1

Residential mortgages £m Neither past due nor impaired Past due but not impaired: - less than 3 months - 3 to 6 months - over 6 months Impaired



At 31 December 2012 Unsecured loans Total £m £m

29,785.3

201.1

1,724.8

31,711.2

2,305.7 1,149.0 871.4 807.1 34,918.5 (773.5) 34,145.0

0.5 73.5 275.1 (49.7) 225.4

160.5 49.3 136.6 228.0 2,299.2 (403.8) 1,895.4

2,466.7 1,198.3 1,008.0 1,108.6 37,492.8 (1,227.0) 36,265.8

49.7 49.7

131.9 271.9 403.8

276.7 950.3 1,227.0

95.1 678.4 773.5

The balances at 30 June 2013 in the above table exclude unsecured loans classified as held for sale. 'Impaired' loans are those which are 12 months or more in arrears, in possession or held for sale with an LPA receiver, and others which management consider to be individually impaired. UKAR Interim Financial Report 30 June 2013

Section C - NRAM

Page 64 of 75



30 June 2013

Notes to the Financial Information (continued) 11. Credit quality of loans to customers (continued) The above table includes balances within 'neither past due nor impaired' which would have been shown as past due or impaired other than due to renegotiation; these were loans where arrears were capitalised during the previous 12 months. These loans amounted to £2.8m for the 12 months to 30 June 2013 (£58.5m for the 12 months to 30 June 2012; £23.9m for the 12 months to 31 December 2012). A loan is eligible for capitalisation of arrears only once the borrower has complied with stringent terms for a set period. The NRAM Group also offers other forbearance methods to borrowers, subject to compliance with loan terms, the aim of these being to assist the borrower to reduce the level of arrears. Management have taken into consideration the forbearance options in applying loan default probabilities and in their overall assessment of the total impairment provision.

12. Arrears and possessions on residential mortgages and unsecured loans Arrears and possessions are monitored for the NRAM Group as a whole, and also split by type of product. 30 June 2013

At

30 June 2012

31 December 2012

Residential

Unsecured

Residential

Unsecured

Residential

Unsecured

Arrears 3 months and over Number of cases Proportion of total cases Asset value Proportion of book Total value of payments overdue Proportion of total book

No. % £m % £m %

14,763 5.05 2,147.5 6.60 92.7 0.28

9,251 7.21 165.2 11.75 18.2 1.29

21,211 6.57 3,001.8 8.26 123.2 0.34

32,987 13.22 445.2 19.55 89.8 3.94

18,179 5.95 2,580.3 7.56 109.2 0.32

31,140 13.67 410.1 21.64 96.9 5.11


No. % £m % £m % No.

1,423 0.49 204.5 0.63 15.3 0.05 2,598

-

1,947 0.60 257.0 0.70 19.7 0.05 3,120

-

1,488 0.49 212.3 0.62 16.1 0.05 5,566

-


No. % £m % £m %

16,186 5.54 2,352.0 7.23 108.0 0.33

9,251 7.21 165.2 11.75 18.2 1.29

23,158 7.17 3,258.8 8.96 142.9 0.39

32,987 13.22 445.2 19.55 89.8 3.94

19,667 6.44 2,792.6 8.18 125.3 0.37

31,140 13.67 410.1 21.64 96.9 5.11

In respect of all arrears (including those which are less than 3 months in arrears) together with possessions, the total value of payments overdue was: Payments overdue £m 132.1 19.5 Total value of payments overdue 172.7 92.3 151.1 99.0 % 0.41 1.39 Proportion of total book 0.48 4.05 0.44 5.22 Loan impairment provision As % of total balances


%

2.17

15.05

Section C - NRAM

2.30

17.51

2.22

Page 65 of 75

17.56



30 June 2013

Notes to the Financial Information (continued) 12. Arrears and possessions on residential mortgages and unsecured loans (continued) Analysis of residential mortgages and unsecured loans 3 months and over in arrears by product 30 June 2013

30 June 2012

31 December 2012

At Residential

Unsecured

Residential

Unsecured

Residential

Unsecured

Buy-to-let Number of cases Proportion of total cases Asset value Proportion of book Total value of payments overdue Proportion of total book

No. % £m % £m %

939 3.50 188.7 5.10 9.6 0.26

-

1,372 4.62 234.8 5.67 10.5 0.25

-

1,184 4.30 208.6 5.42 9.5 0.25

-

Together Number of cases Proportion of total cases Asset value Proportion of book Total value of payments overdue Proportion of total book

No. % £m % £m %

6,741 5.38 771.6 6.11 32.3 0.26

9,521 7.21 165.2 11.75 18.2 1.29

9,686 7.21 1,099.3 8.03 45.5 0.33

14,708 10.58 252.3 14.21 23.4 1.32

8,422 6.49 958.2 7.27 40.0 0.30

13,541 10.18 228.4 15.21 22.9 1.52

Standard and other Number of cases Proportion of total cases Asset value Proportion of book Total value of payments overdue Proportion of total book

No. % £m % £m %

7,083 5.05 1,187.2 7.34 50.8 0.31

-

10,153 6.39 1,667.7 9.00 67.2 0.36

18,279 16.54 192.9 38.49 66.4 13.25

8,573 5.79 1,413.5 8.26 59.6 0.35

17,599 18.57 181.7 46.21 74.0 18.82

The balances at 30 June 2013 in the above tables exclude unsecured loans classified as held for sale.

13. Debt securities in issue Covered Bonds £m 7,481.1 (1,382.8) (81.4) 6,016.9

Other £m 452.8 (91.5) 18.6 379.9

Total £m 23,417.6 (2,566.8) 587.1 21,437.9

16,981.3

8,571.5

-

25,552.8

At 1 January 2012 Repayments Other movements At 30 June 2012

Securitised notes £m 19,208.8 (1,573.3) (273.6) 17,361.9

Covered Bonds £m 8,105.7 (250.0) (344.6) 7,511.1

Securitised assets

18,972.1

9,951.3

Securitised notes £m 19,208.8 (2,832.8) (453.8) (438.5) 15,483.7

Covered Bonds £m 8,105.7 (250.0) (374.6) 7,481.1

Other £m 1,390.5 (922.4) (15.3) 452.8

Total £m 28,705.0 (4,005.2) (453.8) (828.4) 23,417.6

17,926.2

9,135.7

-

27,061.9

At 1 January 2013 Repayments Other movements At 30 June 2013 Securitised assets

At 1 January 2012 Repayments Repurchase Other movements At 31 December 2012 Securitised assets UKAR Interim Financial Report 30 June 2013

Securitised notes £m 15,483.7 (1,092.5) 649.9 15,041.1

Section C - NRAM

Other £m 1,390.5 (914.6) (7.3) 468.6 -

Total £m 28,705.0 (2,737.9) (625.5) 25,341.6 28,923.4

Page 66 of 75



30 June 2013

Notes to the Financial Information (continued) 13. Debt securities in issue (continued) Other movements comprise exchange rate movements, accrued interest and hedge accounting adjustments. The NRAM Group issued debt securities to securitise loans and advances to customers through SPVs and Covered Bonds, and also raised unsecured medium term funding, the amounts of which are shown above. Certain of these were subject to fair value hedge designation, and the carrying values of these instruments include unamortised adjustments in respect of the notes that were hedged. HM Treasury has provided guarantees with regard to certain wholesale borrowings; NRAM pays a fee for these guarantees currently at the rate of £12.0m per annum. The fee is not dependent on balances outstanding, and hence it is included within 'fee and commission expense'. Securitised assets represent loans and advances to customers which have been used to securitise issued notes and cash deposits of SPV companies held with third parties.

14. Provisions Provisions include £82.6m (30 June 2012: £nil; 31 December 2012: £42.2m) in respect of Consumer Credit Act ('CCA') noncompliance. This provision was increased by £47.0m during the period, following further analysis of the level of potential exposure. In addition, there was a net release of £2.0m in respect of provisions for other remediation activities. Provisions also include £83.5m (30 June 2012: £129.9m; 31 December 2012: £104.6m) in respect of potential claims from customers regarding Payment Protection Insurance ('PPI') and other customer redress.

15. Reserves Reserves comprise the following: At

Share premium reserve Capital redemption reserve Available-for-sale reserve Cash flow hedge reserve Total

30 June 2013

30 June 2012

£m 403.2 7.3 (55.2) 136.5 491.8

£m 403.2 7.3 (92.9) 152.5 470.1

31 December 2012 £m 403.2 7.3 (73.8) 157.0 493.7

16. Capital structure Capital resources - Northern Rock (Asset Management) plc (company only) At

30 June 2012

31 December 2012

£m

£m

£m

2,746.7 55.2 (150.5) (65.4) 101.4 41.5 (0.9) 2,728.0 23.4 2,751.4

Share capital and reserves Available-for-sale reserve adjustments Cash flow hedge reserve adjustments Net pension adjustment Reserve capital instruments Tier one notes Less: deductions Tier 1 capital Subordinated notes Subordinated liabilities Total capital


30 June 2013

Section C - NRAM

2,281.4 92.7 (141.7) (65.4) 101.4 42.3 (1.2) 2,309.5 23.4 150.7 2,483.6

2,515.1 73.7 (192.2) (43.0) 101.4 41.9 (1.1) 2,495.8 23.4 150.7 2,669.9

Page 67 of 75



30 June 2013

Notes to the Financial Information (continued) 17. Fair value disclosures (a) Categories of financial assets and financial liabilities: carrying value compared to fair value The following table summarises the carrying amounts and the fair values of financial assets and liabilities: At 30 June 2013 Financial assets: Balances with the Bank of England Cash at bank and in hand Investment securities Loans to customers Fair value adjustments on portfolio hedging Derivative financial instruments Other financial assets Total financial assets

Financial liabilities: Amounts due to banks HM Treasury loans Derivative financial instruments Debt securities in issue Capital instruments Other financial liabilities Total financial liabilities At 31 December 2012 Financial assets: Balances with the Bank of England Cash at bank and in hand Investment securities Loans to customers Fair value adjustments on portfolio hedging Derivative financial instruments Other financial assets Total financial assets

Financial liabilities: Amounts due to banks HM Treasury loans Derivative financial instruments Debt securities in issue Capital instruments Other financial liabilities Total financial liabilities

Carrying value £m

Fair value £m

4,050.0 1,061.7 1,245.7 34,440.6 120.4 4,284.2 18.9 45,221.5

4,050.0 1,061.7 1,228.7 34,499.9 4,284.2 18.9 45,143.4

Carrying value £m

Fair value £m

2,871.6 17,340.8 236.2 21,437.9 62.0 56.0 42,004.5

2,871.6 17,340.8 236.2 20,363.7 37.0 56.0 40,905.3

Carrying value £m

Fair value £m

4,758.5 1,877.1 1,557.2 36,265.8 152.5 3,919.8 28.0 48,558.9

4,758.5 1,877.1 1,465.7 36,317.6 3,919.8 28.0 48,366.7

Carrying value £m

Fair value £m

3,573.7 18,063.1 281.5 23,417.6 213.0 86.1 45,635.0

3,573.7 18,063.1 281.5 22,095.4 189.1 86.1 44,288.9

Note: the fair values above as at 31 December 2012 have not been restated to comply with IFRS 13. differences between these fair values and IFRS 13-compliant fair values would not be material.

However, any

The only financial assets and liabilities which are carried at fair value on the Balance Sheet are investment securities and derivative financial assets and liabilities. The valuation techniques and inputs used to derive fair values at 30 June 2013 are as follows.


Section C - NRAM

Page 68 of 75



30 June 2013

Notes to the Financial Information (continued) 17. Fair value disclosures (continued) (a) Categories of financial assets and financial liabilities: carrying value compared to fair value (continued) Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where an active market is considered to exist, fair values are based on quoted prices or lead manager prices. For instruments which do not have active markets, fair value is calculated using present value models, which take individual cash flows together with assumptions based on market conditions and credit spreads, and are consistent with accepted economic methodologies for pricing financial instruments. (b) Valuation bases Financial assets and liabilities carried at fair value are valued on the following bases: At 30 June 2013

Level 1 £m

Level 2 £m

Level 3 £m

Total £m

-

59.6 4,284.2

-

59.6 4,284.2

-

(236.2) 4,107.6

-

(236.2) 4,107.6

Financial assets Investment securities - available for sale Derivative financial instruments Financial liabilities Derivative financial liabilities Net financial assets Level 1: Level 2: Level 3:

Quoted prices (unadjusted) in active markets for identical assets and liabilities. Inputs other than quoted prices that are observable for the asset or liability, whether directly (ie as price) or indirectly (ie derived from the implications of prices). Inputs for the asset or liability that are not based on observable market data, or have significant unobservable inputs.

There were no transfers between Level 1 and Level 2 during the 6 months ended 30 June 2013. Available-for sale investment securities which are categorised as Level 2 are those which are less frequently traded, and hence trade prices are not considered sufficient evidence of fair value. Fair value is estimated by the securities' lead managers by calculating discounted expected future cash flows, also taking into account recent trades, similar assets adjusted for credit spreads, and where applicable the underlying performance of assets backing the securities. Derivative financial instruments which are categorised as Level 2 are those which either: (a) Have future cash flows which are on known dates and for which the cash flow amounts are known or calculable by reference to observable interest and foreign currency exchange rates; or (b) Have future cash flows which are not pre-defined, but for which the fair value of the instrument has very low sensitivity to changes in estimate of future cash flows. In each case the fair value is calculated by discounting future cash flows using benchmark, observable market interest rates.

18. Related party disclosures NRAM considers the Board of Directors and the members of the Executive Committee to be the key management personnel. Transactions during the period with NRAM's key management personnel and other related parties were similar in nature to those during the year ended 31 December 2012. NRAM repaid £721m of the HM Treasury loan during the period (6 months to 30 June 2012: £88m; 12 months to 31 December 2012: £1,674m), and repaid in full the HM Treasury PIK interest of £150.9m (2012: £nil).


Section C - NRAM

Page 69 of 75

Northern Rock (Asset Management) plc Notes to the Financial Information (continued)


30 June 2013

19. Contingent liabilities The CCA regulates certain classes of mortgages and loans, including the unsecured element of the Together mortgage product. As detailed in the NRAM Group's 2012 Annual Report & Accounts, NRAM did not comply with the requirements of the CCA in respect of some documentation provided to certain customers with CCA-regulated loans and therefore made a provision during 2012 for NRAM's best estimate of the cost of providing remediation to those customers. During the period, the provision was increased by a further £47.0m following further analysis of the level of potential exposure. If any customers were to make a formal legal claim against NRAM in respect of other loans, NRAM would incur costs in defending its position, and should any such claim result in proceedings which are pursued through the courts and which succeed, NRAM could be liable for remediation to those claimant customers and potentially other customers with the same circumstances. No formal legal claims have been received from any customers in respect of loans which are not CCA-regulated and no provision has been made. As described in the NRAM Group's 2012 Annual Report & Accounts, on 23 July 2012 NRAM announced the sale of £465m of loans to customers, at par, secured on residential property, to Virgin Money. Under the terms of the sale, NRAM provided certain warranties. Any claim under the warranties must be made by 28 March 2014. NRAM's maximum liability under these warranties is limited to £35m.

20. Risks and uncertainties The Directors are aware of the following material risks and uncertainties which may affect NRAM during the period to 31 March 2014: external economic factors including unemployment, house price movements, the extent and timing of changes in interest rates, and the rate of interest charged on the HM Treasury loan. There may be other risks that are not listed above that the Directors are not aware of or that the Directors do not consider material. The business, financial condition or results of operations of NRAM could be adversely affected by any of these risks. Further discussion of risk management and control were provided on pages 11-13 of NRAM's 2012 Annual Report & Accounts.

21. Events after the reporting period In July 2013 the NRAM Group completed the £400m sale of its standalone unsecured personal loan book, realising a profit on sale of £21m. Under the terms of the sale, NRAM provided certain warranties. Any claim under the warranties must be made by 31 March 2015. NRAM's maximum liability under these warranties is limited to £35m. On the Balance Sheet, these loans have been classified as held for sale.


Section C - NRAM

Page 70 of 75

Northern Rock (Asset Management) plc Notes to the Financial Information (continued)


30 June 2013

The financial information in this document is unaudited and does not constitute statutory accounts within the meaning of section 435 of the Companies Act 2006. The comparative figures for the financial year ended 31 December 2012 are not the statutory accounts for that financial year for Northern Rock (Asset Management) plc. The 2012 statutory accounts of Northern Rock (Asset Management) plc have been reported on by that company's auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified, 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 contain a statement under section 498(2) or (3) of the Companies Act 2006. This document may contain forward-looking statements with respect to certain plans and current goals and expectations relating to the future financial conditions, business performance and results of Northern Rock (Asset Management) plc. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Northern Rock (Asset Management) plc including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuation in interest rates and exchange rates, inflation, deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Northern Rock (Asset Management) plc and its affiliates operate. As a result, the actual future financial condition, business performance and results of Northern Rock (Asset Management) plc may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements.


Section C - NRAM

Page 71 of 75



30 June 2013

Statement of Directors' Responsibilities The Directors confirm that this Interim Financial Report has been prepared in accordance with IAS 34 as adopted by the European Union and that the management commentary and related notes includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:  

An indication of important events that have occurred during the first six months and their impact on the condensed Financial Statements and a description of the principal risks and uncertainties for the remaining nine months of the financial period; and Material related party transactions in the first six months and any material changes in the related party transactions described in the last annual report.

The Directors of Northern Rock (Asset Management) plc at the date of this report are: Richard Pym Kent Atkinson Richard Banks Michael Buckley Sue Langley Phillip McLelland Keith Morgan Jim O'Neil Louise Patten John Tattersall On behalf of the Board

Richard Banks Chief Executive Officer 5 August 2013

Phillip McLelland Finance Director 5 August 2013

Northern Rock (Asset Management) plc, Registered Office: Croft Road, Crossflatts, Bingley, West Yorkshire BD16 2UA. Registered in England and Wales under company number 03273685. UKAR Interim Financial Report 30 June 2013

Section C - NRAM

Page 72 of 75



30 June 2013

Independent Review Report to Northern Rock (Asset Management) plc Introduction We have been engaged by the company to review the condensed set of Financial Statements in the Interim Financial Report for the six months ended 30 June 2013, which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity, Consolidated Cash Flow Statement and the related notes. We have read the other information contained in the Interim Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of Financial Statements. Directors' responsibilities The Interim Financial Report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Interim Financial Report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority. As disclosed in note 2, the Annual Financial Statements of the NRAM Group are prepared in accordance with IFRS as adopted by the European Union. The condensed set of Financial Statements included in this Interim Financial Report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' as adopted by the European Union. Our responsibility Our responsibility is to express to the company a conclusion on the condensed set of Financial Statements in the Interim Financial Report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Disclosure and Transparency Rules of the Financial Conduct Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity', issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland), and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based 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 Report for the six months ended 30 June 2013 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

PricewaterhouseCoopers LLP Chartered Accountants Bristol 5 August 2013

The maintenance and integrity of the Northern Rock (Asset Management) plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Financial Statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.


Section C - NRAM

Page 73 of 75



30 June 2013

Contact information The 2013 Interim Financial Reports for B&B and NRAM are available on the websites at www.bbg.co.uk and www.nram.co.uk within the Corporate Information sections.

Contacts Brunswick Jonathan Glass / Nick Cosgrove Tel: +44 20 7404 5959 Email: [email protected]

Investor relations contacts Neil Vanham Tel: +44 1274 806341 Email: [email protected]

Page 74 of 75

UK Asset Resolution Limited - Registered Office: Croft Road, Crossflatts, Bingley, West Yorkshire BD16 2UA. Registered in England and Wales under company number 07301961.

www.ukar.co.uk