bradford & bingley plc annual report & accounts...

Registered in England and Wales under company number 03938288

Bradford & Bingley plc

Annual Report & Accounts 2012


2

Contents

PageDirectors’ Report 3Principal Risks and Uncertainties 10Independent Auditors' Report 13Consolidated Income Statement 15Consolidated Statement of Comprehensive Income 16Balance Sheets 17Consolidated Statement of Changes in Equity 18Company Statement of Changes in Equity 19Cash Flow Statements 20Notes to the Financial Statements 21

Directors' Report Annual Report & Accounts 2012

3

The Directors present their Annual Report and Accounts for the year ended 31 December 2012. Bradford & Bingleyplc ('B&B' or 'the Company') is a public limited company which was incorporated in the United Kingdom under theCompanies Act 2006 and is registered in England and Wales. The Company and its subsidiary undertakingscomprise the Bradford & Bingley plc Group ('the Group').

ResultsThe Consolidated Income Statement on page 15 shows the statutory profit before tax for 2012 of £213.7m (2011:£434.5m).

DividendsNo dividends were paid during the year (2011: £nil) and the Directors do not recommend the payment of a finaldividend (2011: £nil).

Principal activitiesThe Group and Company operates as servicer of mortgage loans secured on residential properties and ofassociated services. No new lending is carried out.

On 1 October 2010 UK Asset Resolution Limited ('UKAR') was established as the holding company for B&B andNorthern Rock (Asset Management) plc ('NRAM'), bringing together the two brands under shared management anda common Board of Directors.

After the transfer into public ownership by the Bradford & Bingley plc Transfer of Securities & Property etc. Order2008, the Group closed its doors to new mortgage applications in 2008, and committed to lend only where a formalmortgage offer or further advance arrangement had already contractually been made. B&B ceased to increaseloans to existing customers except in specific circumstances where doing so supported the strategic priorities ofrunning down the Balance Sheet or minimising impairments and losses. In accordance with this strategy, the Grouphas already taken a number of actions to facilitate mortgage redemptions and continues to plan additional initiativeswith the same aim.

The overall aim of UKAR is to maximise value for the taxpayer. This will be achieved by focusing on key activitiesand themes based on each of the following three objectives:

Reduce, protect and optimise the Balance Sheet; Maximise cost effectiveness via continuous improvement; and To be excellent in customer and debt management.

These objectives are underpinned by the need to treat customers and creditors fairly.

The focus of the Group is now on servicing the mortgage book and on collection of arrears in an effective andefficient manner.

Business reviewIn 2012, the Group's underlying profits decreased by £61.1m to £238.1m (2011: £299.2m). The decrease in profitswas primarily due to the impact of a full year of interest charged on the B&B Working Capital Facility ('WCF') at thehigher rate introduced in August 2011 (c. £165m), partly offset by lower loan impairment and investment impairmentcharges.

Statutory profit before tax was significantly lower at £213.7m (2011: £434.5m), mainly due to lower gains on therepurchase of liabilities.

In addition to the statutory measure of profit, the Board continue to believe it is appropriate to assess performancebased on the underlying profit of the business, which excludes non-recurring costs, particularly those associatedwith the integration with NRAM and certain gains such as the repurchase of our own liabilities at a discount. Alsoexcluded are movements in fair value and hedge ineffectiveness relating to financial instruments which areexpected to be held to maturity as opposed to being traded. The commentary on the results in this statement usesunderlying profits and its components as the measure of performance. Analysis of the difference between thestatutory measure of profit and the underlying profit of the Group is provided on page 5.

Compared to 2011, underlying net operating income was £133.5m lower at £342.5m (2011: £476.0m) due to theincreased rate on the WCF and a reducing Balance Sheet. Ongoing administrative expenses reduced by £10.5m(10.1%) to £93.4m (2011: £103.9m). Impairment on loans to customers reduced by £17.3m to £62.1m (2011:£79.4m) and net impairment on investment securities was £44.6m better being a credit of £51.1m (2011: £6.5mcredit). The number of mortgage accounts 3 or more months in arrears, including possessions, reduced by 33%compared to 2011.

Directors' Report (continued) Annual Report & Accounts 2012

4

Business review (continued)

The UKAR Board has decided to change the UKAR Group's and B&B's accounting reference date from 31December to 31 March. This is in order to align to the year end of B&B's ultimate parent, HM Treasury. Therefore,B&B's next Annual Report and Accounts will cover the 15 months to 31 March 2014. Prior to that, the Boardintends to publish Interim Financial Reports for the periods to 30 June 2013 and 30 September 2013.

Key performance indicators ('KPIs')

In addition to the primary Financial Statements, we have adopted the following KPIs in managing businessperformance in the context of its strategic priorities.

Strategicpriorities

Financial measures 2012 2011 Commentary

Lending balances secured £bn 32.5 34.1 Lending balances reduced by 4.7% during the year due to£1.3bn of residential redemptions and £0.3bn of other capitalrepayments.

Residential mortgage redemption rate %Residential redemptions £bn

4.01.3

4.21.5

Redemptions have fallen slightly compared to 2011 reflectingthe characteristics of the book and the low levels ofremortgage activity across the market.

Government loan repayments £bnGovernment loan balance £bn

1.4325.4

0.1526.9

No drawdowns were made in the year from the WCFarranged with HM Treasury. The balance of £7.0bn, excludingaccrued interest, is within the £11.5bn maximum facility levelcurrently agreed with HM Treasury. Repayments of £1.4bnwere made in the year against the WCF. No payments weremade against the Statutory Debt and the balance remains at£18.4bn at the year end.

Optimise theBalance Sheet

Total cash payments to HM Treasury £bn 1.93 0.65 Total cash paid to HM Treasury during the year. Thisincludes principal and interest repayments, State guaranteefees and corporation tax paid. The main drivers of theincrease year on year are £1.4bn principal repayment and anadditional £0.2bn increase in interest payments on the WCFfollowing the increase in the rate in August 2011.

Residential arrears balance : totalresidential mortgage balance %

Residential payments overdue £m 0.1134.6

0.1652.6

This represents the value of customers’ missed payments asa proportion of the total balance of all residential mortgagesand the reduction to 0.11% reflects that the level of overduedebt owed on mortgages is falling faster than the book.

Residential arrears 3 months and over andpossessions as % of the book:

- by value- by number of accounts

Number of residential arrears 3 months andover and possessions cases

2.722.10

5,914

3.91 2.948,767

The reduction in arrears reflects both the improvement incollections performance and the continuing support providedto mortgage customers of low interest rates.

Minimiseimpairmentand losses

Impairment provisions:Residential £m

Cover %Commercial £m

Cover %

637.61.96

50.3 8.29

718.12.10

52.3 8.16

The level of the residential impairment Balance Sheetprovision reduced by £80.5m and the level of coverdecreased from 2.10% to 1.96% due to the improved arrearsperformance.

Reduce costs Total costs £mOngoing costs £m*

Ratio of costs to average interest-earningassets:

- statutory %- ongoing %*

117.4 93.4

0.320.25

128.9103.9

0.330.26

The reduction primarily reflects the benefits of implementingcommon systems across the UKAR Group.

* 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.


5


Income Statement 2012 2011For the year ended 31 December £m £mNet interest income 323.1 458.4Underlying non interest income* 19.4 17.6Underlying net operating income 342.5 476.0Ongoing administrative expenses (93.4) (103.9)Impairment on loans to customers (62.1) (79.4)Net impairment on investment securities 51.1 6.5Underlying profit before taxation 238.1 299.2Unrealised fair value movements on financial instruments (6.6) 68.3Hedge ineffectiveness (9.4) (59.0)Other net administrative expenses (24.0) (25.0)Provision for customer redress (12.0) -Gain on repurchase of own liabilities 27.6 151.0Statutory profit before taxation 213.7 434.5

* Underlying non interest income includes total fee and commission income, net realised gains less losses on investment securities and otheroperating income.

Net interest income was 29.5% lower at £323.1m (2011: £458.4m). The reduction in net interest income is primarilydue to the full year impact of the increase on the interest rate payable on the WCF which increased by 3.50% inAugust 2011, and a £2.6bn decrease in average interest-earning assets.Net interest margin fell by 0.29% to 0.87% (2011: 1.16%). The main driver of the 0.29% reduction in the underlyingnet interest margin to 0.87% (2011: 1.16%) was the full year impact of the increase in the interest rate payable onthe WCF costing approximately £165m additional interest compared to December 2011, partly offset by higheryields on assets.Underlying non interest income increased £1.8m to £19.4m (2011: £17.6m), mainly due to the recovery ofpreviously written-off assets.

B&B uses derivative financial instruments for economic hedging purposes. Some of these are designated andaccounted for as IAS 39 'Financial Instruments: Recognition and Measurement' compliant fair value or cash flowhedge relationships. Where effective hedge relationships can be established, the movement in the fair value of thederivative is offset in full or in part by opposite movements in the fair value of the instrument being hedged or beingtaken to reserves. Any ineffectiveness arising from different movements in fair value will offset over time.

Unrealised fair value movements were a loss of £6.6m in the period (2011: gain of £68.3m) generally relating toderivatives that act as an economic hedge but were not treated as an accounting hedge under IAS 39 'FinancialInstruments: Recognition and Measurement'. Specifically these movements are due to changes in the value ofbasis swaps used to hedge the overall interest rate risk on the Balance Sheet, prior to their inclusion into a cashflow hedge at 1 March 2012. Movements after this date are recognised in reserves. The £74.9m year on yeardeterioration in unrealised fair value movements is due to the narrowing of LIBOR over the Bank of England BaseRate ('BBR') prior to this date.

Ongoing administrative expenses were lower at £93.4m (2011: £103.9m) with the ratio of costs to average interest-earning assets at 0.25% (2011: 0.26%).The reduction in costs reflects the benefits of implementing common systems across UKAR and also clear focus oncost management to reduce costs as the size of the Balance Sheet runs down.

The UKAR Group has incentive schemes in place which have been agreed with UK Financial Investments ('UKFI').These enable staff to earn awards which are aligned to UKAR Group and individual performance. For 2012, thetotal of all incentives earned by employees of all UKAR Group Companies, including those of the ExecutiveDirectors, was £7.0m (2011: £5.6m). The increase in incentives paid is due to an increase in the number of staffeligible for a bonus and the first award under the medium term incentive plan ('MTIP') for senior managers in 2012.The average payment under the short term incentive plan ('STIP') was flat year on year. Of this, £3.0m (2011:£3.4m) was charged in B&B and is included within ongoing administrative expenses. Of the £7.0m, £6.3m (2011:£4.9m), (£2.7m in B&B, 2011: £2.8m) will be paid in 2013, and the remainder will be deferred and paid in futureyears. All deferred amounts are subject to clawback terms.

Other net administrative expenses of £24.0m in 2012 mainly reflect one-off costs associated with the transfer of theIT platform to a new outsourced provider, HCL Technologies Limited ('HCL'). 2011 costs of £25.0m reflected costsin establishing common systems across the UKAR Group, together with expected redundancy costs.


6


The residential loan impairment charge reduced by £16.8m to £64.5m (2011: £81.3m) reflecting lower arrearsvolumes and minimal new fraud and professional negligence cases. Write-offs in the year totalled £175.8m (2011:£200.9m).

The year end provisions for residential loan impairment held on the Balance Sheet reduced by £80.5m in the year to£637.6m (2011: £718.1m), reflecting sales of properties from possession, lower arrears volumes and minimal newfraud cases identified during 2012. As a proportion of balances, the residential impairment provision was 1.96%(2011: 2.10%).

The number of cases 3 months or more in arrears, including those in possession, fell by 33% to close the year at5,914 cases.The number of properties in possession increased from 587 cases in 2011 to 717 in 2012. In addition to residentialproperty possessions, we also have a number of buy-to-let properties managed by a Law of Property Act ('LPA')receiver. Our LPA 'for sale' stock reduced from 785 cases in 2011 to 306 in 2012.The commercial impairment charge was a credit of £2.4m in the year (2011: credit of £1.9m). The year endprovision for the commercial book reduced to £50.3m (2011: £52.3m) mainly due to write-offs of fully providedaccounts.

The £51.1m gain (2011: £6.5m gain) relating to impairment on investment securities mainly reflects gains onpreviously impaired assets.

In July 2012 the Group repurchased some of its securitised notes (£83.9m) yielding gains of £27.6m. In 2011,£151.0m of gains resulted from the repurchase of capital instruments.The overall tax charge for the year is £48.4m (2011; £101.0m), giving an effective tax rate of 22.6% (2011: 23.2%).This rate is lower than the average corporation tax rate mainly due to the release of tax provisions for resolvedissues.The Balance Sheet has decreased by £1.6bn since December 2011 as a result of a reduction in lending balances of£1.6bn (4.7%) during the year to £32.5bn (2011: £34.1bn), reflecting £1.3bn of residential redemptions and £0.3bnof other capital repayments. Wholesale asset balances are £0.5bn higher, at £3.7bn (2011: £3.2bn) reflectinghigher collateral holdings.The Statutory Debt remained static over the year at £18.4bn, but the WCF reduced by £1,425m (2011: £150m) to£7.0bn (2011: £8.4bn) with no drawdowns from the facility in 2012. Wholesale funding decreased to £9.6bn (2011:£9.9bn) reflecting the repayment of maturing wholesale debt, partly offset by an increase in liability collateralholdings.At the start of the year, B&B had £11.15bn of funding from HM Treasury, plus a further £15.7bn owed to theFinancial Services Compensation Scheme ('FSCS'). Repayment of this debt remains a primary objective of B&B.In the year £1,425m (2011: £150m) of HM Treasury debt was repaid, and, in addition, other cash flows weregenerated for Her Majesty's Government in the form of State guarantee fees, interest and taxes. The Boardconsiders the total of all these cash flows paid to HM Treasury to be an important measure. Total cash repaymentsto HM Treasury in 2012 were £1.9bn (2011: £0.7bn). At the end of 2012, the gross loan balance due to HMTreasury and the FSCS was £25.4bn (2011: £26.9bn).

The Company's capital is provided by its shareholder, HM Treasury and the holders of subordinated notes andsubordinated liabilities. B&B met its capital requirements in full throughout the year and has received no additionalcapital from HM Treasury.

The Company's total capital resources are £22.8m lower than 2011, the net reduction being a result of the increasein pension funding costs partly offset by the profits made in the year.The Company operates under a MIPRU regulatory status. Strictly, the Company is required to hold capital inexcess of 1% of the Company's total Balance Sheet assets plus any undrawn commitments. However, the Boardbelieves it should hold capital above 1% reflecting the increased risk in the business compared to a standardMIPRU firm, and at the year end capital in the Company represented 4.5% of the Company's assets.


7


Financial risk management objectives and policiesInformation regarding the financial risk management objectives and policies of the Group, in relation to the use offinancial instruments, is given in note 34. A description of the principal risks to which the Group and Company areexposed is provided on pages 10 to 12 which form an integral part of the audited Financial Statements.

Group structureOn 1 October 2010 UKAR was established as the holding company for B&B and NRAM, bringing together the twocompanies under shared management and a common Board of Directors.UKAR itself is 100% owned by the UK Government which exercises control through UKFI which was set up on 3November 2008 to manage the Government’s investments in Royal Bank of Scotland, Lloyds Banking Group,Northern Rock and Bradford & Bingley.

Although managed under a common board and management structure, NRAM and B&B remain separate legalentities and continue to operate as individual companies with their own individual brands and Balance Sheets.

DirectorsThe names of the Directors of the Company are below.Richard Pym Non-Executive Chairman for the whole of 2012Kent Atkinson Director for the whole of 2012Richard Banks Director for the whole of 2012Michael Buckley Director for the whole of 2012Sue Langley Director for the whole of 2012Phillip McLelland Director for the whole of 2012Keith Morgan Director for the whole of 2012Jim O'Neil Appointed 28 June 2012Louise Patten Director for the whole of 2012John Tattersall Director for the whole of 2012

Directors' interests

UKAR, B&B and NRAM share a common Board of Directors. Their individual profiles are included within the UKARGroup Annual Report and Accounts.

Directors’ remunerationDetails of Directors' remuneration are set out in the UKAR Group Annual Report and Accounts. These are availableon UKAR's website at www.ukar.co.uk. The remuneration disclosed in the UKAR Group accounts is the totalremuneration for the Directors for all UKAR companies.

Directors’ conflicts of interestThe Board, as permitted by the Company’s articles of association, has authorised all potential conflicts of interestdeclared by individual Directors, and a full register is reviewed and maintained.

Directors’ indemnitiesUKAR has provided each Director with a Deed of Indemnity indemnifying them to the fullest extent permitted by lawagainst all losses suffered or incurred in respect of acts and omissions arising as a result of holding office. Theindemnities also extend to the reimbursement of each Director with the costs of defending all claims, actions andproceedings including regulatory investigation arising out of or connected with the exercise of, or failure to exercise,any of the Director’s powers, duties or responsibilities as an officer, director, trustee, agent or employee of theUKAR Group and any of its subsidiaries. Reimbursement is subject to the Director’s obligation to repay theCompany in accordance with the provisions of the Companies Act 2006. The payment obligations of the Companyunder each Deed of Indemnity are backed by a specific guarantee in favour of the Director entered into between theCompany and HM Treasury.

The Company has also arranged Directors' and Officers' Insurance on behalf of the Directors in accordance with theprovisions of the Companies Act 2006.


8

Statement of Directors’ responsibilitiesThe Directors are responsible for preparing the Annual Report and the Financial Statements in accordance withapplicable law and regulations. Company law requires the Directors to prepare financial statements for eachfinancial year. Under that law the Directors have prepared the Group and Parent Company Financial Statements inaccordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union. Undercompany law the Directors must not approve the Financial Statements unless they are satisfied that they give a trueand fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for thatperiod. In preparing these Financial Statements, the Directors are required to:

select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable IFRS as adopted by the European Union have been followed, subject to any material

departures disclosed and explained in the Financial Statements; and prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the

Company will continue in business.The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain theCompany’s transactions and disclose with reasonable accuracy at any time the financial position of the Companyand the Group and enable them to ensure that the Financial Statements comply with the Companies Act 2006 and,as regards the Group Financial Statements, Article 4 of the IAS Regulation. They are also responsible forsafeguarding the assets of the Company and the Group and hence for taking reasonable steps for the preventionand detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Company’s website, and legislation in theUnited Kingdom governing the preparation and dissemination of financial statements may differ from legislation inother jurisdictions.Each of the Directors confirms that, to the best of each person’s knowledge and belief:

the Financial Statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view ofthe assets, liabilities, financial position and profit of the Group and Company; and

the Directors’ Report contained in the Annual Report includes a fair review of the development and performanceof the business and the position of the Company and Group, together with a description of the principal risksand uncertainties that they face.

The Annual Report and Accounts, taken as a whole, is fair, balanced and understandable, providing theinformation necessary for shareholders to assess the Group's performance, business model and strategy.

Going concernAs set out in note 1 to the Financial Statements, HM Treasury has provided various on-demand facilities to theCompany and provided confirmation to the Directors that it is its intention to continue to fund the Company so as tomaintain the Company as a going concern, and enable the Company to meets its debts as and when they fall duefor a period up to at least 1 November 2014. Accordingly, the Directors are satisfied at the time of approval of theFinancial Statements that the Group and the Company have adequate resources to continue in business for theforeseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing theFinancial Statements.

EmployeesThe UKAR Group is committed to providing employment practices and policies which recognise the diversity of ourworkforce and ensure equality for employees regardless of sex, race, disability, age, sexual orientation or religiousbelief.

Employees are kept closely involved in major changes affecting them through measures such as team meetings,briefings, internal communications and engagement surveys. There are well established procedures, includingregular meetings with our recognised union, to ensure that the views of employees are taken into account inreaching decisions.

The UKAR Group is committed to providing employees with comprehensive coverage of the economic and financialissues affecting the Group. We have established a full suite of communication channels, including an extensiveface-to-face briefing programme which allows us to update our employees on our performance and any financialissues throughout the year.

The Non-Executive Directors have service contracts with UKAR. All Executive Directors and colleagues wereemployed by B&B (the legal employer) during 2012.


9

Policy and practice on payment of creditorsIt is the policy of the Company to aim to pay creditor invoices within 30 days of the invoice date. The Company iswilling to consider requests by small suppliers for a shorter settlement period. The average number of creditor daysin 2012 was 25 days (2011: 25 days).

Political and charitable contributionsB&B supports fundraising activities by matching the first £250 of funds raised per employee during the year and bymatching employee donations through a payroll-giving programme. During the year, B&B matched employeefundraising to the total of £14,378 (2011: £6,369) and payroll-giving totalled £13,455 (2011: £13,537).

No contributions were made for political purposes during the year (2011: £nil). The Group does not make anypayments that might be deemed to be political in nature.

Property, plant and equipmentLand and buildings, which are included in the Balance Sheet at cost less accumulated depreciation and impairment,amounted to £8.2m at 31 December 2012 (2011: £8.5m). In the Directors' opinion, based on valuations carried outby the Group's external qualified Chartered Surveyors, the total market value of those assets at that date was notsignificantly different to the Balance Sheet amount.

Auditors and audit informationAs at the date of this report, each person who is a Director confirms that:

So far as each Director is aware there is no relevant audit information of which the Company’s auditor isunaware; and

Each Director has taken such steps as he or she ought to have taken as a Director in order to make him orherself aware of any relevant audit information and to establish that the Company’s auditor is aware of thatinformation.

This confirmation is given and should be interpreted in accordance with the provisions of Section 418 (2) of theCompanies Act 2006.A resolution to re-appoint PricewaterhouseCoopers LLP ('PwC') as the Group's auditors will be put to theShareholder at the forthcoming AGM.

Paul HopkinsonCompany Secretary, on behalf of the Board22 March 2013

Principal Risks and Uncertainties Annual Report & Accounts 2012

10

Risk management and control

IntroductionThe following sections describe the Group's major risk categories under management. Other factors could affectthe Group's results, including economic factors. Therefore, the categories of risk described below should not beconsidered to represent all of the potential risks and uncertainties which could impact the Group.

Risk categorisationThe Group categorises Risk under the following headings:

(i) Credit riskCredit risk is the potential for financial loss caused by a retail or commercial customer, or wholesale counterparty,failing to meet their obligations to the Group as they become due. As the Group is no longer making any new retailloans, the absolute level of retail credit risk is expected to decline as the current assets mature and wholesale creditrisk will decline in line with the maturity profile of financial instruments and investments. Credit risk is the largest riskthe Group faces and the monitoring of the recoverability of loans and amounts due from counterparties is inherentacross most of the Group's activities.

The Group employs credit behaviour scoring and fraud detection techniques to support loss minimising strategies.As no new lending is now being undertaken, the focus of credit risk activities is on:

A proactive approach to the identification and control of loan impairment in the Residential and CommercialCredit Risk and Credit Control areas;

Fraud and professional negligence investigation; and The use of credit behaviour scoring and other techniques to monitor the risk profile of the existing book.

Adverse changes in the credit quality of borrowers or a general deterioration in UK economic conditions could affectthe recoverability and value of the Group's assets and therefore the Group's financial performance.

As credit risk is the main risk to the Group, a credit risk framework has been established as part of the overallgovernance framework to measure, mitigate and manage credit risk within risk appetite. To a lesser degree, theGroup is exposed to other forms of credit risk such as those arising from settlement activities where the risk is aconsequence of a transaction, rather than a driver of it.

The extent to which credit risk in the Group’s Balance Sheet is mitigated is shown by the following table ofprovisions for mark-downs on impaired assets:

At 31 DecemberBalance Sheet

value ProvisionBalance Sheet

value Provision 2012 2012 2011 2011

£m £m £m £m

Advances secured on residential property 31,911 638 33,492 718

Other secured advances 557 50 589 52

Wholesale assets 3,717 230 3,214 294

The Group's ability to influence the structure of its credit risk profiles, in the absence of asset sales, is largelyrestricted to the degree of control which it has over risk strategy, loan redemptions and credit collections activity.With the composition of the loan portfolio largely fixed in the short to medium term, the Group's credit risk profilesare now determined by the credit quality of the existing portfolio. Changes in credit quality will arise from: changesin the underlying economic environment; assumptions about the future trends in the economy; changes in thespecific characteristics of individual loans; and the credit risk strategies developed to add value to the book whilstmitigating credit risk.

It is Group policy to monitor the profile of the Group's lending exposure on a quarterly basis. Changes in the riskprofile are reported as part of the Group's stress tests. The stress tests forecast losses, impairment and capitalrequirements at a portfolio and product level over a 10 year horizon given a range of economic scenarios.

The Board receives a monthly update on changes in the key drivers of the lending credit risk profile, with moredetailed information on the factors underlying these key drivers being reported monthly to the Executive RiskCommittee ('ERC').


11

Risk categorisation (continued)

(i) Credit risk (continued)

Credit related policies and limits are developed and maintained within Credit Risk and are reviewed and approvedannually by the Board, or when significant changes to policies are recommended. The ERC ensures that anyexposure to credit risk remains within overall risk exposure levels as agreed by the Board.

Authorised credit risk limits for wholesale money market counterparties reflect their credit rating as well as size,depth and quality of their capital base. Wholesale Credit related policies and limits are developed and maintainedby Wholesale Risk and are approved by the Board at least annually, or when material changes to policies arerecommended.

The Group holds a structured finance portfolio that primarily consists of investments in asset backed securities(‘ABS’). The credit risk is determined by the quality of the underlying securitised assets. No new structured financeinvestments are permitted apart from the purchase of those issued by the Group's own secured funding vehicles.

(ii) Market risk

Market risk is the potential for change in Group income or Group net worth arising from movements in interestrates, exchange rates or other market prices. Effective identification and management of market risk is essential formaintaining stable net interest income. The Group does not trade or make markets in any areas and market riskarises only as a consequence of carrying out and supporting core business activities.

Market risk comprises interest rate risk and foreign exchange risk. Interest rate risk is principally managed viainterest rate swaps and foreign exchange risk by foreign exchange contracts.

The Board's appetite for market risk is expressed in the market risk limits set out in the Board approved Market RiskPolicy. Responsibility for staying within limits is delegated to the Investment Director and exposures are reporteddaily by Finance to senior management and monthly by Wholesale Risk to the Asset and Liability Committee('ALCO'). ALCO is responsible for ensuring that the Investment Director implements market risk strategiesconsistently with the Board's Risk Appetite.

(iii) Liquidity risk

Liquidity risk is the risk of being unable to pay liabilities as they fall due and arises from both the mismatch in asset,liability, derivative, and collateral cash flows and from unforeseen changes to these.

The Board's appetite for liquidity risk is expressed as minimum liquidity levels as set out in the UKAR Liquidity RiskPolicy. Responsibility for managing liquidity risk is delegated to the Investment Director. Stress tests are used toassess the adequacy of liquidity both daily and monthly by Finance and Wholesale Risk and the results are reportedto ALCO. ALCO is responsible for ensuring that the strategies of the Investment Director maintain liquidity riskwithin the Board's Risk Appetite.

Sterling liquidity is held as cash balances at the Bank of England. Euro and US dollar cash balances are held at arange of highly rated banks.

(iv) Operational riskOperational risk is defined as:

'The risk of loss resulting from inadequate or failed internal processes, people and systems, or from externalevents'.

The Operational Risk Framework includes a balance of policies, appropriate procedures and internal controls toenable effective identification, assessment, mitigation and reporting of key operational risks. The framework isoverseen and reported on by the Operational Risk Function. The key objectives of the framework are as follows:

Risk and control self assessment

Provision of a consistent framework for the identification, assessment, monitoring and reporting of significant risksand key controls across the Group. Where controls are assessed as ineffective in design or operation, a definedCorrective Action Plan process is in place to develop, track and implement control improvements.

Operational risk event reportingProvision of a consistent framework for the identification, investigation, assessment and reporting of OperationalRisk Events (losses, gains and near misses) across the Group. Root cause analysis performed as part ofOperational Risk Event Reporting enhances the control environment by directing control improvement effort wherethere is a risk of event recurrence.


12

Risk categorisation (continued)

(iv) Operational risk (continued)

Operational risk weighted financial impact analysis and scenario analysisThe Group undertakes operational risk weighted financial impact analysis and scenario analysis to calculate thefinancial impact of both expected and unexpected operational risk events. This analysis facilitates a comparisonbetween operational risk, financial exposure and the operational risk capital allocation derived under the Group'scapital adequacy assessment process.

(v) Strategic riskStrategic risk is managed at a UKAR Group level and is defined as the current or prospective risk to earnings and /or fair value, given the B&B Group and the NRAM Group Balance Sheet structure, arising from changes in thebusiness environment and from adverse business decisions, improper implementation of decisions or lack ofresponsiveness to changes in the business environment.

The UKAR Group considers the six primary strategic risks to be macroeconomic environment, market stresses,structural asset/liability mix, political, regulatory and legal risk, infrastructure risk and project risk.

The UKAR Group's focus is on continuous assessment and measurement of movement in strategic risk status inorder to ensure continuous monitoring of potential impacts on the 10 Year Plan, annual business and operatingplans, and the UKAR Group's overarching strategic objectives. Thus, close oversight of movements in strategic risk(proximity, financial impact, probability) is maintained via monthly reporting to the Executive Committee ('EXCO')and the Board. Where appropriate, and taking in to account the mainly external nature of strategic risk, riskmanagement strategies can then be defined to mitigate the impact of a risk event arising.

Independent Auditors' Report Annual Report & Accounts 2012

13

Independent Auditors' report to the Members of Bradford & Bingley plcWe have audited the Group and Parent Company Financial Statements (the ‘Financial Statements’) of Bradford & Bingley plc forthe year ended 31 December 2012 which comprise the Consolidated Income Statement, Consolidated Statement ofComprehensive Income, the Group and Parent Company Balance Sheet, the Consolidated Statement of Changes in Equity, theCompany Statement of Changes in Equity, the Consolidated Cash Flow Statement, the Parent Company Cash Flow Statementand the related notes. The financial reporting framework that has been applied in their preparation is applicable law andInternational Financial Reporting Standards ('IFRS') as adopted by the European Union and, as regards the Parent CompanyFinancial Statements, as applied in accordance with the provisions of the Companies Act 2006.

Respective responsibilities of directors and auditorsAs explained more fully in the Statement of Directors’ Responsibilities set out on page 8, the Directors are responsible for thepreparation of the Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to auditand express an opinion on the Financial Statements in accordance with applicable law and International Standards on Auditing(UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Group’s members as a body in accordance withChapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept orassume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it maycome save where expressly agreed by our prior consent in writing.

Scope of the audit of the Financial StatementsAn audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonableassurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includesan assessment of: whether the accounting policies are appropriate to the Group’s and Company’s circumstances and have beenconsistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors;and the overall presentation of the Financial Statements. In addition, we read all the financial and non-financial information inthe Annual Report & Accounts to identify material inconsistencies with the audited Financial Statements. If we become aware ofany apparent material misstatements or inconsistencies we consider the implication for our report.

Opinion on Financial StatementsIn our opinion: the Financial Statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31

December 2012 and of the Group’s profit and Group’s and Parent Company’s cash flows for the year then ended; the Group Financial Statements have been properly prepared in accordance with IFRS as adopted by the European Union; the Parent Company Financial Statements have been properly prepared in accordance with IFRS as adopted by the

European Union and as applied in accordance with the provisions of the Companies Act 2006; and the Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as

regards the Group Financial Statements, Article 4 of the lAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006In our opinion the information given in the Directors’ Report for the financial year for which the Financial Statements are preparedis consistent with the Financial Statements.

Matters on which we are required to report by exceptionWe have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in ouropinion: adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been

received from branches not visited by us; or the Parent Company Financial Statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit.

Craig Gentle (Senior Statutory Auditor)for and on behalf of PricewaterhouseCoopers LLPChartered Accountants and Statutory AuditorsBristol22 March 2013

Accounts Annual Report & Accounts 2012

14

The Accounts

Page15 Consolidated Income Statement

16 Consolidated Statement of Comprehensive Income

17 Balance Sheets

18 Consolidated Statement of Changes in Equity

19 Company Statement of Changes in Equity

20 Cash Flow Statements

Notes to the Financial StatementsPage Note

21 1 Principal accounting policies

29 2 Critical judgements and accounting estimates

30 3 Net interest income

31 4 Net realised gains less losses on investment securities

31 5 Unrealised fair value movements on financial

instruments and hedge ineffectiveness

31 6 Administrative expenses

33 7 Gain on repurchase of own liabilities

33 8 Taxation

34 9 Investment securities

34 10 Wholesale assets

38 11 Loans to customers

39 12 Impairment on loans to customers

40 13 Credit quality of loans to customers

43 14 Investments in Group undertakings

44 15 Deferred taxation

45 16 Other assets

46 17 Property, plant and equipment

47 18 Intangible assets

Page Note

48 19 Amounts due to banks

48 20 Other deposits

48 21 Statutory Debt and HM Treasury loans

49 22 Debt securities in issue

50 23 Other liabilities

50 24 Retirement benefit obligations

53 25 Provisions

54 26 Capital instruments

55 27 Called up share capital

55 28 Reserves

56 29 Off-Balance Sheet commitments

57 30 Related party disclosures

58 31 Capital structure

59 32 Financial instruments

67 33 Collateral pledged and received

68 34 Financial risk management

74 35 Contingent liabilities

75 36 Ultimate controlling party

75 37 Events after the reporting period


15

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December

Note2012

£m2011

£m

Interest receivable and similar income 3 916.3 961.0Interest expense and similar charges 3 (593.2) (502.6)Net interest income 3 323.1 458.4

Fee and commission income 14.4 17.3Net realised gains less losses on investment securities 4 1.4 -Unrealised fair value movements on financial instruments 5 (6.6) 68.3Hedge ineffectiveness 5 (9.4) (59.0)Provision for customer redress 25 (12.0) -Other operating income 3.6 0.3Non-interest income (8.6) 26.9

Net operating income 314.5 485.3

Administrative expenses: 6- Ongoing (93.4) (103.9)- Other net expenses (24.0) (25.0)

Impairment on loans to customers 12 (62.1) (79.4)Net impairment on investment securities 51.1 6.5Gain on repurchase of own liabilities 7 27.6 151.0Profit before taxation 213.7 434.5

Taxation 8 (48.4) (101.0)

Profit for the financial year 165.3 333.5

The notes on pages 21 to 75 form an integral part of these Financial Statements.

The Company's profit after tax for the financial year was £63.8m (2011: £246.2m). As permitted by Section 408 of the Companies Act 2006, theCompany's Income Statement and Statement of Comprehensive Income have not been presented in these Financial Statements.

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


16

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2012Gross of tax Tax Net of tax

£m £m £m

Profit for the financial year 213.7 (48.4) 165.3

Available-for-sale instruments:- net losses recognised in available-for-sale reserve during the year (0.8) 0.2 (0.6)- amounts transferred from available-for-sale reserve and recognised in profit during the year (2.7) 0.7 (2.0)

Cash flow hedges:- net losses recognised in cash flow hedge reserve during the year (335.4) 166.9 (168.5)- amounts transferred from cash flow hedge reserve and recognised in profit during the year 356.5 (177.4) 179.1

Actuarial losses on retirement benefit obligations (64.3) 14.3 (50.0)Total other comprehensive expense (46.7) 4.7 (42.0)

Total comprehensive income for the financial year 167.0 (43.7) 123.3

For the year ended 31 December 2011Gross of tax Tax Net of tax

£m £m £m

Profit for the financial year 434.5 (101.0) 333.5

Available-for-sale instruments:- net gains recognised in available-for-sale reserve during the year 8.4 (2.3) 6.1- amounts transferred from available-for-sale reserve and recognised in profit during the year (0.6) 0.2 (0.4)

Cash flow hedges:- net gains recognised in cash flow hedge reserve during the year 163.1 (30.7) 132.4- amounts transferred from cash flow hedge reserve and recognised in profit during the year (28.8) 5.4 (23.4)

Actuarial gains on retirement benefit obligations 34.0 (11.0) 23.0Effect of funding plan for retirement benefit obligations 117.6 (30.7) 86.9Total other comprehensive income 293.7 (69.1) 224.6

Total comprehensive income for the financial year 728.2 (170.1) 558.1


17

BALANCE SHEETS

Group Company31 December 31 December 31 December 31 December

2012 2011 2012 2011Note

£m £m £m £m

AssetsBalances with the Bank of England 841.3 884.6 841.3 884.4Cash at bank and in hand 2,252.0 1,386.7 1,192.2 572.6Investment securities 9 623.9 943.1 924.4 1,243.6Loans to customers 11 32,467.8 34,079.8 32,310.6 34,203.9Fair value adjustments on portfolio hedging 11 341.4 362.6 341.4 362.6Derivative financial instruments 32(e) 1,800.3 2,318.0 1,299.8 1,659.1Investments in Group undertakings 14 - - 991.2 991.2Other assets 16 60.9 36.0 58.7 35.5Deferred tax assets 15 3.0 34.2 - -Property, plant and equipment 17 24.8 23.9 24.8 23.8Intangible assets 18 46.2 33.3 46.2 33.3Total assets 38,461.6 40,102.2 38,030.6 40,010.0

LiabilitiesAmounts due to banks 19 1,221.2 393.7 605.6 35.2Other deposits 20 - - 4,643.8 5,214.5Statutory Debt and HM Treasury loans 21 25,424.2 26,855.8 25,424.2 26,855.8Derivative financial instruments 32(e) 502.2 577.9 502.2 577.9Debt securities in issue 22 8,337.9 9,505.5 4,061.6 4,681.9Other liabilities 23 103.8 98.7 99.2 94.2Current tax liabilities 18.2 26.0 10.5 9.0Deferred tax liabilities 15 - - 11.3 7.0Retirement benefit obligations 24 70.5 24.6 70.5 24.6Provisions 25 72.9 47.7 72.9 47.7Capital instruments 26 146.2 131.1 146.2 131.1Total liabilities 35,897.1 37,661.0 35,648.0 37,678.9

EquityIssued capital and reserves attributable to equity holder of the parent:- Share capital 27 361.3 361.3 361.3 361.3- Reserves 28 338.3 330.3 332.0 294.3- Retained earnings 1,864.9 1,749.6 1,689.3 1,675.5

Share capital and reserves 2,564.5 2,441.2 2,382.6 2,331.1

Total equity and liabilities 38,461.6 40,102.2 38,030.6 40,010.0

The notes on pages 21 to 75 form an integral part of these Financial Statements.

The Financial Statements were approved by the Board of Directors and authorised for issue on 22 March 2013 and signed on its behalf by:

Richard Banks Phillip McLellandChief Executive Officer Finance Director

Bradford & Bingley plc is registered in England and Wales under company number 03938288.


18

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2012

Sharecapital

£m

Sharepremium

reserve£m

Capitalredemption

reserve£m

Available-for-salereserve

£m

Cash flowhedge

reserve£m

Retainedearnings

£m

Total sharecapital and

reserves£m

At 1 January 2012 361.3 198.9 29.2 19.7 82.5 1,749.6 2,441.2

Other comprehensive (expense)/income:- Net movement in available-for-sale reserve - - - (3.5) - - (3.5)- Net movement in cash flow hedge reserve - - - - 21.1 - 21.1- Actuarial gains and losses - - - - - (64.3) (64.3)- Tax effects of the above - - - 0.9 (10.5) 14.3 4.7Total other comprehensive (expense)/income - - - (2.6) 10.6 (50.0) (42.0)Profit for the financial year - - - - - 165.3 165.3Total comprehensive income - - - (2.6) 10.6 115.3 123.3At 31 December 2012 361.3 198.9 29.2 17.1 93.1 1,864.9 2,564.5


Sharecapital

£m

Sharepremium

reserve£m

Capitalredemption

reserve£m


£m

Cash flowhedge

reserve£m

Retainedearnings

£m


reserves£m

At 1 January 2011 361.3 198.9 29.2 14.0 (26.5) 1,306.2 1,883.1

Other comprehensive income:- Net movement in available-for-sale reserve - - - 7.8 - - 7.8- Net movement in cash flow hedge reserve - - - - 134.3 - 134.3- Actuarial gains and losses - - - - - 34.0 34.0- Effect of funding plan for retirement benefit

obligations- - - - - 117.6 117.6

- Tax effects of the above - - - (2.1) (25.3) (41.7) (69.1)Total other comprehensive income - - - 5.7 109.0 109.9 224.6Profit for the financial year - - - - - 333.5 333.5Total comprehensive income - - - 5.7 109.0 443.4 558.1At 31 December 2011 361.3 198.9 29.2 19.7 82.5 1,749.6 2,441.2


19

COMPANY STATEMENT OF CHANGES IN EQUITY


Sharecapital

£m

Sharepremium

reserve£m

Capitalredemption

reserve£m


£m

Cash flowhedge

reserve£m

Retainedearnings

£m


reserves£m

At 1 January 2012 361.3 198.9 29.2 19.6 46.6 1,675.5 2,331.1

Other comprehensive (expense)/income:- Net movement in available-for-sale reserve - - - (3.4) - - (3.4)- Net movement in cash flow hedge reserve - - - - 50.7 - 50.7- Actuarial gains and losses - - - - - (64.3) (64.3)- Tax effects of the above - - - 0.9 (10.5) 14.3 4.7Total other comprehensive (expense)/income - - - (2.5) 40.2 (50.0) (12.3)Profit for the financial year - - - - - 63.8 63.8Total comprehensive income - - - (2.5) 40.2 13.8 51.5At 31 December 2012 361.3 198.9 29.2 17.1 86.8 1,689.3 2,382.6


Sharecapital

£m

Sharepremium

reserve£m

Capitalredemption

reserve£m


£m

Cash flowhedge

reserve£m

Retainedearnings

£m


reserves£m

At 1 January 2011 361.3 198.9 29.2 14.0 (26.5) 1,319.5 1,896.4

Other comprehensive income:- Net movement in available-for-sale reserve - - - 7.8 - - 7.8- Net movement in cash flow hedge reserve - - - - 98.4 - 98.4- Actuarial gains and losses - - - - - 34.0 34.0- Effect of funding plan for retirement benefit

obligations- - - - - 117.6 117.6

- Tax effects of the above - - - (2.2) (25.3) (41.8) (69.3)Total other comprehensive income - - - 5.6 73.1 109.8 188.5Profit for the financial year - - - - - 246.2 246.2Total comprehensive income - - - 5.6 73.1 356.0 434.7At 31 December 2011 361.3 198.9 29.2 19.6 46.6 1,675.5 2,331.1


20

CASH FLOW STATEMENTS

For the year ended 31 December

Group Company2012 2011 2012 2011

£m £m £m £m

Cash flows from operating activitiesProfit before taxation for the financial year 213.7 434.5 96.5 302.6Adjustments to reconcile profit to cash flows used in operating activities:- Depreciation and amortisation 10.6 6.8 10.6 6.8- Impairment on loans to customers 62.1 79.4 14.3 41.7- Net impairment on investment securities (51.1) (6.5) (51.1) (6.5)- Gain on repurchase of own liabilities (27.6) (151.0) (0.1) (151.0)- Income taxes paid (22.3) (157.8) (22.3) (167.9)- Fair value adjustments on financial instruments (93.7) (48.4) (90.1) (65.9)- Other non-cash movements (152.2) 162.1 3.1 48.0

Cash flows (used in)/from operating activities before changes inoperating assets and liabilities (60.5) 319.1 (39.1) 7.8

Net (increase)/decrease in operating assets:- Loans to customers 1,549.9 2,706.5 1,878.9 2,314.1- Derivative financial instruments receivable 517.7 611.1 359.3 443.2- Other assets (25.0) (18.4) (23.2) (21.8)

Net increase/(decrease) in operating liabilities:- Amounts due to banks and other deposits 827.5 (1,759.0) (0.4) (1,791.7)- Derivative financial instruments payable (75.7) 46.0 (75.7) (29.6)- Debt securities in issue (757.7) (3,013.1) (389.9) (2,623.7)- Other liabilities 7.5 (87.2) (27.9) (8.1)- Provisions (21.5) 13.2 (21.5) 13.2

Net cash used from/(used in) operating activities 1,962.2 (1,181.8) 1,660.5 (1,696.6)

Cash flows from investing activities- Purchase of property, plant and equipment and intangible assets (24.5) (42.2) (24.5) (42.2)- Proceeds from sale of property, plant and equipment and intangible assets 0.1 0.3 - -- Purchase of investment securities - - (56.1) -- Proceeds from sale and redemption of investment securities 365.0 702.6 421.1 825.5- Return of capital from subsidiary undertakings - - - 120.0

Net cash from investing activities 340.6 660.7 340.5 903.3

Cash flows used in financing activities- Repayment of Working Capital Facility (1,425.0) (150.0) (1,425.0) (150.0)- Repurchase of own liabilities (56.5) (134.3) (0.1) (134.3)

Net cash used in financing activities (1,481.5) (284.3) (1,425.1) (284.3)

Net increase/(decrease) in cash and cash equivalents 821.3 (805.4) 575.9 (1,077.6)Cash and cash equivalents at beginning of year 2,271.3 3,076.7 1,457.0 2,534.6Cash and cash equivalents at end of year 3,092.6 2,271.3 2,032.9 1,457.0

Represented by cash and assets with original maturity of three months orless within:- Balances with the Bank of England 840.9 884.6 840.9 884.4- Cash at bank and in hand 2,251.7 1,386.7 1,192.0 572.6

Total 3,092.6 2,271.3 2,032.9 1,457.0

Notes to the Financial Statements Annual Report & Accounts 2012

21

1. Principal accounting policies

Bradford & Bingley plc (‘the Company’) is a public limited company incorporated and domiciled in the United Kingdom.

These Financial Statements were authorised for issue by the Directors on 22 March 2013 and will be put to the shareholder for approval at theCompany's Annual General Meeting to be held on 27 March 2013.

(a) Statement of complianceBoth the B&B Company Financial Statements and the Group (comprising B&B and its subsidiaries) Financial Statements have been preparedand approved by the Directors in accordance with International Financial Reporting Standards ('IFRS') as adopted by the EU. In publishing theCompany Financial Statements here together with the Group Financial Statements, the Company has taken advantage of the exemption in s408of the Companies Act 2006 not to present its individual Income Statement and related notes.

For these 2012 Financial Statements, including the 2011 comparative financial information where applicable, the Group and Company haveadopted for the first time the following statement:

The December 2010 amendments to IAS 12 'Income Taxes' relating to 'Deferred Tax: Recovery of Underlying Assets'. This amendment ismandatory for 2012 financial statements, with 2011 comparative information. Adoption of this statement has had no impact on the FinancialStatements of the Group or Company

For these 2012 Financial Statements the Group and Company have not adopted the following statements; the Group and Company areassessing the impacts of these statements on their Financial Statements:

IFRS 9 ‘Financial Instruments’, sections of which have been issued as part of the International Accounting Standard Board’s (‘IASB’s’)project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. This statement is expected to be mandatory for 2015financial statements, with 2014 comparative information, but has not yet been adopted for use in the EU. The Group continues to monitordevelopments.

IFRS 10 ‘Consolidated Financial Statements’. In the EU, this statement is mandatory for 2014 financial statements, with 2013 comparativeinformation.

IFRS 11 ‘Joint Arrangements’. In the EU, this statement is mandatory for 2014 financial statements, with 2013 comparative information.

IFRS 12 ‘Disclosure of Interests in Other Entities’. In the EU, this statement is mandatory for 2014 financial statements, with 2013comparative information.

IFRS 13 ‘Fair Value Measurement’. This statement is mandatory for 2013 financial statements, with 2012 comparative information.

IAS 27 ‘Separate Financial Statements’ (revised 2011). In the EU, this statement is mandatory for 2014 financial statements, with 2013comparative information.

IAS 28 ‘Investments in Associates’ (revised 2011). In the EU, this statement is mandatory for 2014 financial statements, with 2013comparative information.

The June 2011 amendments to IAS 1 ‘Presentation of Financial Statements’ relating to ‘Presentation of Items of Other ComprehensiveIncome’. This statement is mandatory for 2013 financial statements, with 2012 comparative information.

The June 2011 amendments to IAS 19 ‘Employee Benefits’. This statement is mandatory for 2013 financial statements, with 2012comparative information.

The December 2011 amendments to IFRS 7 'Financial Instruments: Disclosures' and IAS 32 ‘Financial Instruments: Presentation' relating tothe offsetting of financial assets and financial liabilities. These amendments are mandatory for 2014 financial statements, with 2013comparative information.

The Annual Improvements to IFRSs 2009-2011 Cycle, issued in May 2012. These changes are expected to be mandatory for 2013financial statements, with 2012 comparative information, but have not yet been adopted for use in the EU.

All other new standards, amendments to standards and interpretations are not considered relevant to, and have no impact upon, the FinancialStatements of the Group or Company.

Notes to the Financial Statements (continued) Annual Report & Accounts 2012

22

1. Principal accounting policies (continued)

(b) Basis of preparation

The Financial Statements have been prepared on a going concern basis and using the historical cost convention except:

(i) the following assets and liabilities are carried at their fair value: derivative financial instruments; financial instruments categorised under IAS 39 as ‘at fair value through profit or loss’; financial instruments categorised under IAS 39 as ‘available-for-sale’; and

(ii) where fair value hedge accounting has been applied, the carrying value of hedged items has been adjusted to take account of the fair value ofthe risk which has been hedged.

The validity of the going concern basis of accounting is dependent upon the funding position of the Company. At the date of approval of theseFinancial Statements, the Group is reliant upon the financing facilities and also upon the guarantee arrangements provided to the Company byHM Treasury. Withdrawal of the financing facilities or the guarantee arrangements would have a significant impact on the Company’s operationsand its ability to continue as a going concern, in which case adjustments may have to be made to reduce the carrying value of assets torecoverable amounts and to provide for further liabilities that might arise. At the signing date of these Financial Statements HM Treasury hasconfirmed its intentions to continue to provide funding until at least 1 November 2014.

The Directors consider that the accounting policies set out in this note are the most appropriate to the Group’s and the Company’scircumstances, have been consistently applied to both the Group and the Company in dealing with items which are considered material, and aresupported by reasonable and prudent estimates and judgements.

The accounting policies have been applied to all periods presented in these Financial Statements and are consistent with the accounting policiesused by the B&B Group in preparing its Interim Financial Report for the six months ended 30 June 2012.

B&B is regulated by the Financial Services Authority ('FSA') as a mortgage administration company and the Directors believe that B&B has anappropriate and adequate level of capital to support these activities subject to the continuing support of HM Treasury.

The Financial Statements have been prepared in accordance with EU-adopted IFRS, IFRIC interpretations issued by the IFRS InterpretationsCommittee (formerly the International Financial Reporting Interpretations Committee) and with those parts of the Companies Act 2006 applicableto companies reporting under IFRS. A summary of accounting policies is set out below. The preparation of the Financial Statements inconformity with these accounting policies and generally accepted accounting principles requires the use of estimates and assumptions that affectthe reported values of assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses duringthe reporting period. Although these estimates are based on management's best knowledge of the amounts, event or actions, actual resultsultimately may differ from those estimates (see note 2).

The Directors consider the business to comprise one operating and geographical segment due to the similarity of risks faced within its UK-basedresidential and commercial portfolios.

The Company includes the assets, liabilities and transactions of Bradford & Bingley Covered Bonds LLP within its own Financial Statements.

(c) Basis of consolidationThe Group’s Financial Statements incorporate on a fully consolidated line-by-line basis the Financial Statements of the Company and thoseentities (including special purpose structures) which are controlled by the Company (its subsidiaries). Control is achieved where the Companyhas the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Where subsidiarieshave been acquired during a period, their results are consolidated into the Group's Financial Statements from the date control is transferred tothe Group. Where subsidiaries have been disposed of, their results are consolidated to the date of disposal. On the acquisition of a business,fair values are attributed to the assets, liabilities and contingent liabilities acquired. Any difference between the consideration given and the fairvalue of the net assets acquired is capitalised as goodwill, which is subject to impairment testing in accordance with IAS 36 ‘Impairment ofAssets’. All intra-Group transactions and balances are eliminated on consolidation.

The Group has securitised various residential mortgage loans, generally by sale or transfer to Special Purpose Vehicles (‘SPVs’) which in turnhave issued securities to investors. The SPVs are consolidated line-by-line into the Group Financial Statements if they are, in substance,controlled by the Company. The Group presently receives substantially all of the post-tax profits of all the SPVs and hence retains substantiallyall of the risks and rewards of the securitised loans, and consequently all of the SPVs are fully consolidated.

(d) Interest income and expenseFor all interest-bearing financial instruments except derivatives, interest income and expense are recognised in the Income Statement on anEffective Interest Rate ('EIR') basis.

The EIR method calculates the amortised cost of a financial asset or financial liability and spreads the resulting interest income or interestexpense on a level yield basis over the expected life of the instrument, or an appropriate shorter period. In respect of loans to customers, theperiod used is the period to which the product reprices to a Standard or Product Variable Rate. The EIR is the rate which at the inception of theinstrument exactly discounts expected future cash flows over the appropriate period to the initial carrying amount. When calculating the EIR,future cash flows are estimated, considering all contractual terms of the instrument (for example prepayment options), but potential future creditlosses are not considered. The calculation includes all directly attributable incremental fees and costs, premia on acquisition of mortgageportfolios and all other premia and discounts as well as interest. Interest on derivatives is included in interest income where the derivative ishedging interest income, and interest expense where the derivative is hedging interest expense.

Interest on derivatives is included in interest income where the derivative is hedging interest income, and interest expense where the derivative ishedging interest expense.

When a financial asset or a group of similar financial assets is written down as a result of an impairment loss, interest income continues to berecognised by applying the applicable EIR to the reduced balance.


23


(e) Fee and commission incomeWhere Value Added Tax (VAT) is charged, income is stated net of VAT.

Commission receivable from the renewal of third party regulated financial services products was recognised as income within ‘fee andcommission income’ when the renewal policy went ‘on risk’, net of any provision for repayment in the event of early termination by the customer.If the commission is receivable on deferred terms, a deemed interest element of the commission is separated and recognised on an EIR basisover the deferred payment period.

Fees charged to existing borrowers, including arrears and redemption fees, are recognised in fee and commission income as they arise.

(f) Bonuses payableAn accrual is made for all bonuses which have been earned by the Balance Sheet date, even though these may not subsequently be payabledue to clawback or the employee leaving the Group.

(g) Financial instrumentsIn accordance with IAS 39 each financial asset is classified at initial recognition into one of four categories:

(i) Financial assets at fair value through profit or loss;(ii) Held-to-maturity;(iii) Loans and receivables; or(iv) Available-for-sale;

and each financial liability into one of two categories:

(v) Financial liabilities at fair value through profit or loss; or(vi) Other liabilities.

Measurement of financial instruments is either at amortised cost (categories (ii), (iii) and (vi) above) or at fair value (categories (i), (iv) and (v)above), depending on the category of financial instrument.

Amortised cost is the amount measured at initial recognition, adjusted for subsequent principal and other payments, less cumulative amortisationcalculated using the EIR method; the amortisation is taken to interest income or expense depending on whether the instrument is an asset or aliability. For assets, the amortised cost balance is reduced where appropriate by an allowance for amounts which are considered to be impairedor uncollectible.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s lengthtransaction. Where an active market is considered to exist, fair values are based on quoted prices or lead manager prices. For instrumentswhich do not have active markets, fair value is calculated using present value models, which take individual cash flows together withassumptions based on market conditions and credit spreads, and are consistent with accepted economic methodologies for pricing financialinstruments. Interest income and interest expense on instruments carried at fair value are included in the Income Statement in ‘interestreceivable and similar income’ or ‘interest expense and similar charges’. Movements in fair value are recognised in the ‘unrealised fair valuemovements on financial instruments’ line in the Income Statement, except in the case of instruments categorised as ‘available-for-sale’, in whichcase the fair value movements are taken to the ‘available-for-sale’ reserve. On sale or derecognition of an available-for-sale instrument theaccumulated fair value movements are transferred from the ‘available-for-sale’ reserve to the ‘net realised gains less losses on investmentsecurities’ line of the Income Statement.

(h) Offsetting financial instrumentsFinancial assets and liabilities are offset and the net amount reported in the Balance Sheet only where there is a legally enforceable right tooffset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.


24


(i) Derivative financial instruments and hedge accountingAll of the Group’s derivative contracts are used for commercial management of exposures to interest rate risks, foreign currency risks and risksarising from forecast transactions.

For many of the Group's derivative contracts hedge accounting is applied. However, in some cases natural offsets apply.

Each derivative is carried at fair value in the Balance Sheet; as an asset when the fair value is positive and as a liability when the fair value isnegative. The fair value of a derivative includes any interest accrued on that derivative. Changes in the fair value of derivatives are charged tothe Income Statement; however by applying the hedge accounting rules set out in IAS 39 the changes in fair value of derivatives which are usedto hedge particular risks can either be mitigated in the Income Statement (fair value hedge accounting) or recognised in other comprehensiveincome (cash flow hedge accounting). The Group has adopted cash flow hedge accounting and fair value hedge accounting.

(i) Cash flow hedge accountingA cash flow hedge is used to hedge exposures to variability in cash flows, such as variable rate financial assets and liabilities. The effectiveportion of changes in the derivative fair value is recognised in other comprehensive income, and recycled to the Income Statement in the periodswhen the hedged item will affect profit and loss. The fair value gain or loss relating to the ineffective portion is recognised immediately in theIncome Statement.

(ii) Fair value hedge accountingA fair value hedge is used to hedge exposures to variability in the fair value of financial assets and liabilities, such as fixed rate loans. Changesin fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Income Statement, together with any changesin the fair value of the hedged asset or liability that are attributable to the hedged risk. The Group uses fair value hedge accounting on one-to-one relationship and portfolio hedging bases, as described below.

Where hedge accounting is not applied, changes in fair values are recognised immediately in the Income Statement.

(iii) One-to-one fair value hedgesWhere one or more specific derivative financial instruments hedge the changes in fair value of a specific asset or liability, provided that the hedgearrangement meets the requirements of IAS 39 to be classed as ‘highly effective’, the associated hedged item is carried on the Balance Sheet atfair value in respect of the hedged risk. Fair value gains and losses are recognised in the Income Statement, mitigating the fair valuemovements on the associated derivative financial instruments. The Income Statement immediately recognises any hedge accounting‘ineffectiveness’, that is any difference between the fair value movement on the hedging instrument and that on the hedged item.

(iv) Portfolio fair value hedgesWhere a group of derivative financial instruments hedges the interest rate exposure of a group of assets or liabilities, and the hedge meets therequirements of IAS 39 to be classed as ‘highly effective’, the hedge relationship is accounted for in the same way as a one-to-one fair valuehedge except that the Balance Sheet carrying value of the hedged items is not adjusted; instead the difference between the carrying value andthe fair value in respect of the hedged risk is carried on the Balance Sheet in ‘fair value adjustments on portfolio hedging’.

(v) Hedge effectivenessAt the inception of each hedging arrangement, the relationship between the hedging instruments and the hedged items is documented, as wellas the risk management objective and strategy. Also documented is an assessment, both at hedge inception and on an ongoing basis, ofwhether the derivatives that are used in the hedging arrangement are 'highly effective' in offsetting changes in fair values or cash flows of thehedged items. Under IAS 39 a hedge is deemed to be 'highly effective' if effectiveness is forecast to fall, and is actually found to fall, within the80% to 125% range. Any hedge relationship falling outside these limits is deemed to be ineffective and hedge accounting is discontinued.

(vi) Termination of hedgesWhere a hedge relationship is terminated or deemed not to be highly effective (other than as a result of the hedged item being derecognisedfrom the Balance Sheet due to sale or other reason), the adjustment relating to the terminated hedge relationship is amortised to the IncomeStatement over the period that the hedged item affects profit and loss.

(vii) Embedded derivativesCertain financial instruments have derivative features embedded within them. Where the economic characteristics and risks of the embeddedderivative are not closely related to those of the host instrument, and where changes in value in the host instrument are not reflected in theIncome Statement, the embedded derivative is separated from the host and carried on the Balance Sheet at fair value, with gains and losses onthe embedded derivative being recognised in the Income Statement. In accordance with IFRIC 9 ‘Reassessment of Embedded Derivatives’ thedecision as to whether to separate and value an embedded derivative is reassessed when and only when the terms of the host contract aresignificantly modified.

(j) Sale and repurchase agreementsSecurities sold subject to repurchase agreements (‘repos’) continue to be reported as they were originally classified within the Group’s BalanceSheet, as the risks and rewards associated with that asset remain with the Group. The counterparty liability is included in ‘loans and otheramounts due to banks’ or ‘other deposits’. Securities purchased under agreements to resell (‘reverse repos’) are recorded as ‘cash at bank andin hand’. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the EIRmethod.


25


(k) Impairment lossesFinancial assets which are not held at fair value through profit or loss are reviewed for indications of possible impairment throughout the year andat each published Balance Sheet date.

An impairment loss is recognised if, and only if, there is objective evidence that a loss event (or events) has occurred after initial recognition andbefore the Balance Sheet date and has a reliably measurable impact on the estimated future cash flows of the financial asset or group offinancial assets. Losses that are incurred as a result of events occurring after the Balance Sheet date are not recognised.

(i) Financial assets held at amortised costFor each asset an assessment is made as to whether an impairment provision should be made on either an individual or a collective basis.Loans where an individual assessment is made include all loans in possession or held for sale with a Law of Property Act ('LPA') receiver andothers which management consider to be individually impaired, for example where a fraud has been uncovered. The carrying value of the loanat the Balance Sheet date is reduced, by applying an impairment allowance, to the net present value of the expected future cash flowsassociated with the loan, calculated at the loan’s original EIR. These cash flows include, where appropriate, estimated amounts recoverable bypossession and sale of the secured property taking into account a discount on property value to reflect a forced sale.

All loans that have been assessed as having no individual impairment are then assessed collectively, grouped by loans with similarcharacteristics. Assessment is made of impairment arising due to events which are believed to have occurred by the Balance Sheet date buthave not yet been reported, taking into account the economic climate in the market. This collective impairment is reflected by reducing thecarrying value of total loans by applying an impairment allowance.

The impairment of loans is charged in the Income Statement in the 'impairment on loans to customers' line.

For impaired loans, interest is accrued for accounting purposes on the loan amount after any impairment adjustments, in accordance with IAS39, using the original EIR of the loan. However, for the purposes of the amount legally due from the borrower, interest continues to accrue onthe full outstanding balance, and it is this full balance plus full interest which is pursued for collection.

A loan is written off and any associated impairment allowance released when and only when the property is sold or the account is redeemed.Any subsequent proceeds are recognised on a cash basis and offset against 'impairment on loans to customers' in the Income Statement.

Where a property has been taken into possession, or an LPA receiver has been appointed to collect rental income on the property, the loancontinues to be carried within 'loans to customers'.

(ii) Available-for-sale financial assetsInvestment securities classified as available-for-sale are carried at fair value, which appropriately reflects any impairment. Impairment isrecognised when the investment security exhibits objective evidence of impairment or is uncollectible. Such evidence may include: Significant financial difficulty; Payment defaults; Renegotiation of terms due to borrower difficulty; Sustained fall in credit rating or creditworthiness; Significant restructuring; Disappearance of an active market; Significant and sustained fall in market price; or Observable data indicating measurable decrease in the estimated future cash flows from a group of financial assets, although the decrease

cannot yet be identified within individual assets in the group.

Movements in the fair value which are a reflection of impairment of the long term value of the investment security are charged to ‘net impairmenton investment securities’ in the Income Statement. Investment impairment losses recognised against investment securities are reversed through‘net impairment on investment securities’ in the Income Statement if the improvement relates to an event occurring after the initial impairmentwas recognised.

If there is a sustained increase in the fair value of an investment security where an impairment loss has previously been recognised, but noimprovement can be attributed to a subsequent credit event, then the increase in value may be treated as a revaluation and recognised throughother comprehensive income in the available-for-sale reserve.

(l) Recognition and derecognition of financial instrumentsPurchases and sales of mortgage portfolios are accounted for on the completion date. All other purchases and sales of financial assets areaccounted for on the date of commitment to buy or sell (the ‘trade date’).

A financial asset is derecognised (i.e. removed from the Balance Sheet) only when substantially all of the risks and rewards associated with thatasset have been transferred to another party.

A financial liability is derecognised only when the contractual obligation is discharged, cancelled or has expired.

(m) Debt and equity securities in issueIssued securities, including capital instruments, are classified as liabilities where the contractual arrangements result in the issuing companyhaving an obligation to deliver either cash or another financial asset to the security holder, or to exchange financial instruments under conditionsthat are potentially unfavourable to the company. Issued securities are classified as equity where they meet the definition of equity and confer aresidual interest in the company’s assets on the holder of the securities. Issued securities include ordinary share capital.

On initial recognition, debt issued is measured at its fair value net of directly attributable issue and transaction costs. Subsequent measurementis at amortised cost using the EIR method to amortise attributable issue and transaction costs, premia and discounts over the life of theinstrument. These costs are charged along with interest on the debt to ‘interest expense and similar charges’. Unamortised amounts are addedto or deducted from the carrying value of the instrument.

Equity instruments (including share capital) are initially recognised at net proceeds, after deducting transaction costs and any related income tax.


26


(n) Foreign currenciesThe presentational and functional currency of the Company, and the presentational currency of the Group, is pounds sterling.

Transactions which are not denominated in pounds sterling are translated into sterling at the spot rate of exchange on the date of the transaction.Monetary assets and liabilities which are not denominated in pounds sterling are translated into pounds sterling at the closing rate of exchange atthe Balance Sheet date.

Foreign exchange gains and losses resulting from the restatement and settlement of such transactions are recognised in the Income Statement.

(o) Intangible assetsIntangible assets comprise computer software systems.

Purchased computer software licences are capitalised as intangible assets where it is probable that future benefits will flow to the Group.Thereafter they are carried at cost less accumulated amortisation. Amortisation is provided on a straight line basis over their useful economiclives, which may be up to five years. Those which have a life expectancy at the outset of less than two years are not capitalised but instead theircosts are charged to the Income Statement as they arise.

Costs that are directly associated with developing identifiable computer software systems are capitalised if the criteria in IAS 38 ‘IntangibleAssets’ are satisfied; the main criteria are that the successful completion of the development project is reasonably certain and that the software isexpected to generate future economic benefits. Each item of capitalised developed computer software is carried at cost less accumulatedamortisation; amortisation is provided on a straight line basis over its estimated useful life. Costs that do not qualify for capitalisation or areassociated with maintaining software are charged to the Income Statement as they arise.

All items of intangible assets are reviewed annually for impairment. If any item is considered to be impaired, it is written down to the impairedvalue, being the higher of value in use and estimated net proceeds of sale. In addition, the estimated useful lives are also reassessed annually,and if they are judged to have changed then the rate of amortisation charged in periods after the date of the change reflects the revisedestimates.

(p) Cash and cash equivalentsCash and cash equivalents comprise balances which are highly liquid and have an original maturity of three months or less.

(q) Taxation(i) Current taxThe charge for taxation is based on the result for the year and takes into account taxation deferred or accelerated arising from temporarydifferences between the carrying amounts of certain items for taxation and for accounting purposes. Tax relating to items which are takendirectly to reserves is also taken directly to reserves.

(ii) Deferred taxDeferred tax is calculated using the liability method, on temporary differences arising between the tax bases of assets and liabilities and theircarrying amounts in the Financial Statements. Deferred tax is determined using tax rates and laws that have been enacted or substantivelyenacted by the Balance Sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability issettled. The principal temporary differences arise from depreciation of property, plant and equipment; revaluation of certain financial assets andliabilities including derivative contracts; provisions for pensions and other post-retirement benefits; tax losses carried forward; and changes inaccounting basis on adoption of IFRS.

Deferred tax assets are recognised when it is probable that future taxable profit will be available against which these temporary differences canbe utilised.

Deferred tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of thereversal of the temporary difference is controlled by the Group and it is probable that the difference will not reverse in the foreseeable future.

Deferred tax related to fair value re-measurement of available-for-sale investments and cash flow hedges, which are recognised in othercomprehensive income, is also recognised in other comprehensive income, and subsequently in the consolidated Income Statement togetherwith the associated gain or loss.

(r) Retirement benefitsThe Group operates a number of retirement benefit plans for its employees, including defined contribution plans, defined benefit plans and post-retirement healthcare benefits. The costs of these plans are charged to the 'administrative expenses' line of the Income Statement and othercomprehensive income in accordance with IAS 19 'Employee Benefits' and IFRIC 14 'IAS 19 - The Limit on a Defined Benefit Asset, MinimumFunding Requirements and their Interaction'. For 2013, the Group and Company will adopt the revisions to IAS 19 which were issued in June2011 and adopted for use in the EU in June 2012. The main effect on the Group and Company of the revisions to IAS 19 is that instead of anexpected rate of return being applied to defined benefit plan assets, the discount rate previously applied to defined benefit plan obligations willinstead be applied to the net surplus or deficit on the plan.

A defined contribution plan is a pension arrangement where the employer pays fixed contributions into a separate fund. The contributions arecharged to the Income Statement when employees have rendered the related services, which is generally in the year of contribution.


27


(r) Retirement benefits (continued)A defined benefit plan is a pension arrangement that defines an amount of pension benefit that an employee will receive during retirement,usually dependent on one or more factors such as age, years of service and salary.

A full actuarial valuation of the Group's defined benefit sections of the existing schemes is undertaken every three years with interim reviews inthe intervening years; these valuations are updated to 30 June and 31 December each year by qualified independent actuaries. For the purposeof these updates, scheme assets are included at their fair value and scheme liabilities are measured on an actuarial basis using the projectedunit credit method. Liabilities are discounted using rates equivalent to the market yields at the Balance Sheet date on high quality corporatebonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of therelated pension liability. Details of the actuarial assumptions made are provided in note 24. The resulting net surplus or deficit is included in theGroup's and Company’s Balance Sheet. Actuarial gains and losses are charged to retained earnings in full in the period in which they occur, andpass through other comprehensive income rather than the Income Statement. The Group’s Income Statement includes the current service costof providing pension benefits, the expected return on the scheme’s assets, net of administration costs, and the interest cost on the scheme’sliabilities. Following closure of the scheme, the current service cost is nil.

At 31 December 2010 the inflation assumption used to determine the Group's benefit obligations was based on the Retail Prices Index ('RPI'),pending fulfilment of conditions which would need to be satisfied in order for the proposed change to a Consumer Prices Index ('CPI') basis tocome into effect in respect of deferred members. These conditions were satisfied during 2011, and consequently CPI has been applied witheffect from 1 January 2011. Consequently the net pension liability carried on the Balance Sheet reduced at that time by a credit to othercomprehensive income.

The Group is committed to a funding plan to address the deficit on the scheme. In accordance with IFRIC 14 the net pension deficit which isrecognised on the Balance Sheet is the higher of the deficit calculated as above and the net value of the committed funding. However, to theextent that the Group has a clear unconditional right to a refund of future surpluses which may arise in the plan, the carrying value of the deficitshould be reduced to take account of the anticipated future available funds. As detailed in note 24, as at 31 December 2010 B&B had no clearunconditional right to the refund of such surpluses, but on 29 March 2011 the Trustees finalised a resolution granting such a right andconsequently the net pension liability carried on the Balance Sheet reduced at that time by a credit to other comprehensive income.

For defined contribution plans, the Group has no further payment obligations once the contributions have been paid. The contributions arerecognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cashrefund or a reduction in the future payments is available.

Post-retirement healthcare benefits are accounted for in the same way as pension benefits, with the present value of the defined benefitobligation being carried as a liability on the Group’s and Company's Balance Sheets. In the event of a defined benefit plan surplus exceeding thevalue of post-retirement medical benefits, these benefits will be offset against the defined benefit asset.

(s) Property, plant and equipmentProperty, plant and equipment are stated at cost less accumulated depreciation and provision for impairment, as appropriate. Additions andsubsequent expenditure are included in the asset’s carrying value or are recognised as a separate asset only when they improve the expectedfuture economic benefits to be derived from the asset. All other expenditure is regarded as repairs and maintenance and is charged to theIncome Statement in the period in which it is incurred. Depreciation is provided so as to write-off the cost less the estimated residual value ofeach significant component of each item of property, plant and equipment over that component’s estimated useful life, as follows:

Freehold land is not depreciated; Freehold and leasehold buildings 6.7% pa on a straight line basis; Motor vehicles 25% pa on a reducing balance basis; Computer equipment 20% - 33% pa on a straight line basis; Fixtures and fittings 20% pa on a straight line basis; and Other plant and equipment and major alterations to buildings 10% pa on a straight line basis or over the remaining life of the building if

shorter.

All items of property, plant and equipment are reviewed annually for impairment. If any item is considered to be impaired, it is written down to thehigher of value in use and estimated net proceeds of sale. In addition, the estimated useful lives and estimated residual values are alsoreassessed annually, and if they are judged to have changed then the rate of depreciation charged in periods after the date of the changereflects the revised estimates.

Assets in the course of construction are not depreciated until they have been completed and transferred to the appropriate category of property,plant and equipment. The costs of financing assets in the course of construction are not included in the costs of the assets. Assets in the courseof construction are included within the impairment test referred to above where appropriate.

A previously recognised impairment charge on an asset may be reversed in full or in part where a change in circumstances leads to a change inthe estimates used to determine its recoverable amount. The carrying value of the asset will only be increased to the carrying value at which itwould have been held had the impairment not been recognised


28


(t) LeasesRentals under operating leases are charged to ‘administrative expenses’ on a straight line basis to the date of change in the rental amount.Typically operating leases have rent review dates in their terms, several years apart, and between those dates the annual rent remains constant.Any initial rent-free period and any lease premia paid are amortised over the full lease period on a straight line basis.

If a lease agreement in which the Group is a lessee transfers the risks and rewards of the asset, the lease is recorded as a finance lease and therelated asset is capitalised. At inception the asset is recorded at the lower of the present value of the minimum lease payments and fair value,and is depreciated over the estimated useful life. The lease obligations are recorded as borrowings. If the lease does not transfer the risks andrewards of the asset, the lease is recorded as an operating lease.

Where an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor in compensation ischarged to the Income Statement in the period in which termination is made.

Where the Group/Company leases assets out under an operating lease agreement, the asset is included in the Balance Sheet based on thenature of the asset. Lease income is recognised over the term of the lease on a straight line basis.

(u) Provisions and contingent liabilitiesProvisions are recognised when, and only when, the following criteria are all met: there is a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation.

Provisions are reviewed at each Balance Sheet date and are released if they no longer meet the above criteria.

Provisions are discounted to net present value using rates which reflect the risks specific to the provision, if the effect of discounting is material.

Contingent liabilities are possible obligations whose existence depends upon the outcome of uncertain future events or are present obligationswhere the outflows of resources are uncertain or cannot be reliably measured. Contingent liabilities are not recognised in the Balance Sheet butare disclosed unless they are remote.

(v) Investment securities heldInvestment securities intended for use on a continuing basis in the Group’s/Company's activities are categorised either as ‘available-for-sale’ oras ‘loans and receivables’; for each instrument, the Directors adopt the category which they consider to be the most appropriate.

Investment securities categorised as available-for-sale are carried at fair value, with movements in fair value, excluding impairment provisions,being taken to the available-for-sale reserve. If an investment security which has been categorised as available-for-sale becomes impaired, theimpairment is charged to the Income Statement in the ‘net impairment on investment securities’ line.

Investment securities categorised as loans and receivables are carried at amortised cost, less any impairment, with any impairment beingcharged to the Income Statement in the ‘net impairment on investment securities’ line.

Where the Directors believe it appropriate to do so, investment securities which were initially categorised as ‘at fair value through profit or loss’ or‘available-for-sale’ have subsequently been re-categorised to ‘loans and receivables’ in accordance with the revisions to IAS 39 issued by theIASB in October 2008.

(w) Investments in Group undertakingsIn the Financial Statements of the Company, investments in Group undertakings are carried at cost less any impairment. Investments arereviewed at each published Balance Sheet date for any indications of impairment. If there is indication of impairment of any investment, thecarrying value of the investment is reviewed, and any impairment identified is charged immediately to the Company's Income Statement.

(x) Financial guaranteesThe Group and Company apply insurance accounting to financial guarantee contracts, and provide against any claims arising under suchcontracts.

(y) Loan commitmentsLoan commitments are disclosed, but are accounted for only if there is an onerous commitment; there were no onerous loan commitments in theyear or previous year. The commitment ceases to be disclosed once it is advanced or expires. Loan commitments comprise commitments toadvance cash sums and to allow drawdown of monies previously overpaid (where the terms of the loan specifically allow). In respect of lifetimemortgages which involved the advance of a lump sum on which interest continues to accrue but is not payable until the loan is redeemed, thecommitment reflects an estimate of the interest expected to roll up until redemption.


29

2. Critical judgements and accounting estimates

In preparing the Financial Statements, management are required to make a series of judgements and estimates. Judgements involve aninterpretation of requirements to decide how to allocate, value or recognise an item. Estimates arise from using assumptions which result in arange of possible outcomes. The most important judgements and estimates used in preparing these Financial Statements are described below.

(a) Qualifying hedge relationshipsIn designating a financial instrument as part of a qualifying hedge relationship the Group has determined that the hedge is expected to be highlyeffective over the life of the hedging instrument. In accounting for a derivative as a cash flow hedge the Group has determined that the hedgedcash flow exposure relates to highly probable future cash flows

(b) Impairment of investment securitiesFor investment securities carried at fair value, judgement is applied in determining whether any fall in value represents impairment, and whetherany increase represents a reversal of impairment. Factors considered in determining whether an asset is impaired, or impairment has reversed,are detailed in note 1(k).

(c) SecuritisationsIn applying the Group's policies on securitised financial assets, the Group has considered both the degree of transfer of risks and rewards onassets transferred to another entity and the degree of control exercised by the Group over the other entity. Where the Group, in substance, controls the entity to which financial assets have been transferred, the entity is included in these

consolidated Financial Statements. Where a Group entity has transferred financial assets to another entity, but has not transferred substantially all of the risks and rewards

relating to the transferred assets, the assets continue to be recognised on the transferring entity's Balance Sheet.

(d) Deferred tax assetsManagement judgement is required to determine the extent to which tax losses can be offset against future taxable profits and thereforerecognised in the form of deferred tax assets, and also the extent to which other temporary differences can be utilised. This judgement is basedupon examination and assessment of the business plan, and the expectation that there may be sufficient profitability in future years. A deferredtax asset is recognised accordingly, but only to the extent to which future taxable profits are foreseen. In excess of this value any taxable lossesand other temporary differences are not recognised as deferred tax assets. Details of deferred tax assets are contained in note 15.

(e) Impairment losses on loansThe Group reviews its loan impairment on a monthly basis and assesses individual impairment losses by reference to an individual review of theunderlying asset and utilises actual loss experience to provide both probabilities of defaults and property forced sale discounts across a portfolioof products. Collective impairment losses on loans are calculated using a statistical model. The key assumptions used in this model are: theprobability of any balance entering into default as a result of an event that had occurred prior to the Balance Sheet date; the probability of thisdefault resulting in possession or write-off; and the estimated subsequent loss incurred. These key assumptions are based on observed datatrends and are updated on a regular basis within agreed methodology to ensure the impairment allowance is entirely representative of thecurrent portfolio. The accuracy of the impairment calculation would therefore be affected by unanticipated changes to the economic situation andassumptions which differ from actual outcomes. To the extent that house prices were to change by +/- 10%, the residential impairmentallowance would be an estimated £33.2m lower (2011: £63.3m) or £34.3m higher (2011: £65.7m) respectively.

(f) ProvisionsProvisions are carried in respect of certain known or forecast future expenditure, as described in note 25. Where the future payment amount isunknown, provisions are set at a level which covers the estimated number of future payments and estimated average payment amount.Provisions are calculated using the best available information, but the actual future outcomes of items provided for may differ from expectations

(g) Fair value calculationsFair value is defined as the value at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm'slength transaction. For the majority of instruments carried at fair value, this is determined by reference to quoted market prices. Where theseare not available, fair value is based upon cash flow models, which use, wherever possible, independently sourced market parameters such asinterest rate yield curves, currency rates and option volatilities. Other factors are also considered, such as counterparty credit quality andliquidity. Management must use judgement to arrive at estimates where not all necessary data can be externally sourced or where factorsspecific to the Group’s holdings need to be considered. The accuracy of the fair value calculations may therefore be affected by unexpectedmarket movements, or variations in actual outcomes when compared to estimates and assumptions used for modelling purposes. For example,if management were to use a tightening in the credit spread of 10 basis points, the fair value of derivatives would increase from the reported fairvalues by £8.6m (2011: £6.7m).


30

3. Net interest income

2012£m

2011£m

Interest receivable and similar incomeOn secured loans 884.8 922.1On investment securities and deposits 31.5 38.9Total interest receivable and similar income 916.3 961.0

Interest expense and similar chargesOn amounts due to banks and HM Treasury (426.1) (295.3)State guarantee fee* (47.4) (74.9)Other (119.7) (132.4)Total interest expense and similar charges (593.2) (502.6)

Net interest income 323.1 458.4

Average balancesInterest-earning assets ('IEA') 36,968 39,570Financed by:- Interest-bearing funding 15,643 18,528- Interest-free funding** 21,325 21,042

Average rates: % %- Gross yield on IEA 2.48 2.43- Cost of interest-bearing funding (3.49) (2.31)

Interest spread (1.01) 0.12State guarantee fee* (0.13) (0.19)Contribution of interest-free funding ** 2.01 1.23Net interest margin on average IEA 0.87 1.16

Average Bank Base Rate 0.50 0.50Average 1-month LIBOR 0.62 0.65Average 3-month LIBOR 0.83 0.88

* At the time of the nationalisation of B&B, HM Treasury provided guarantees with regard to certain wholesale borrowings and derivative transactions existing at thattime. The amount of this fee is dependent on balances outstanding, and hence it is included within 'interest expense and similar charges'.

** Interest-free funding is calculated as an average over the financial year, and includes the Statutory Debt and share capital and reserves.

Total interest receivable and similar income includes interest accrued on individually impaired assets of £5.0m (2011 £6.5m).


31

4. Net realised gains less losses on investment securities

Net realised gains less losses on investment securities recognised in the Income Statement comprised the following:

2012 2011£m £m

Net realised gains on available-for-sale instruments 1.4 -Total net realised gains less losses on investment securities 1.4 -

5. Unrealised fair value movements on financial instruments and hedge ineffectiveness

2012 2011£m £m

Net (loss)/gain in fair value:- fair value movements on derivatives which are economic hedges but are not in hedge accountingrelationships (6.6) 68.3

Unrealised fair value movements (6.6) 68.3

Net gains/(losses) on fair value hedging instruments 26.2 (150.0)Net (losses)/gains on fair value hedged items attributable to hedged risk (35.6) 91.0Net hedge ineffectiveness losses (9.4) (59.0)

Total (16.0) 9.3

6. Administrative expenses

Certain employees of B&B work for NRAM, and the staff numbers below show B&B's employees split by which company they work for. NRAMhad no direct employees during the years presented.

The monthly average number of persons employed by the UKAR Group during the year was as follows:

2012 2011For the year ended 31 December Number NumberAverage headcount:Full time 1,923 1,855Part time 501 538Total employed 2,424 2,393Working for NRAM:Full time 1,017 982Part time 342 382Total working for NRAM 1,359 1,364Working for B&B:Full time 906 873Part time 159 156Total working for B&B 1,065 1,029

Total average full time equivalent 2,249 2,199Total average full time equivalent working for NRAM 1,234 1,221Total average full time equivalent working for B&B 1,015 978

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


32

6. Administrative expenses (continued)

The number of persons employed by the UKAR Group at the end of the year was as follows:

2012 2011Number Number

Full time 1,965 1,954Part time 471 538Total employed 2,436 2,492Working for NRAM:Full time 839 1,089Part time 319 378Total working for NRAM 1,158 1,467Working for B&B:Full time 1,126 865Part time 152 160Total working for B&B 1,278 1,025

Total full time equivalent headcount 2,277 2,305Total full time equivalent headcount working for NRAM 1,046 1,332Total full time equivalent headcount working for B&B 1,231 973

Staff numbers include Executive but not Non-Executive Directors. In addition to the permanent staff above, the B&B Group employed a full timeequivalent of 191 temporary staff and specialist contractors at 31 December 2012 (2011: 220).

Group cost Recharge Net cost Net cost2012 2012 2012 2011

£m £m £m £mThe Group's aggregate costs of permanent staff were as follows:Wages and salaries 64.8 (36.8) 28.0 31.1Social security costs 6.5 (3.5) 3.0 3.2Defined benefit pension costs (see note 24d) 0.9 - 0.9 (0.4)Defined contribution pension costs (see note 24a) 3.6 (2.2) 1.4 1.3Other retirement benefit costs (see note 24d) 0.5 - 0.5 0.5Total staff costs 76.3 (42.5) 33.8 35.7IT costs 43.9 (18.0) 25.9 27.2Outsourced and professional services 16.3 (2.9) 13.4 16.2Depreciation and amortisation (see notes 17 and 18) 10.6 (5.9) 4.7 1.8Other administrative expenses 21.9 (6.3) 15.6 23.0Ongoing administrative expenses 169.0 (75.6) 93.4 103.9Other net administrative expenses:- Transformation costs 51.7 (27.7) 24.0 19.4- Accelerated depreciation - - - 5.6Total other net expenses 51.7 (27.7) 24.0 25.0Total administrative expenses 220.7 (103.3) 117.4 128.9

Other net expenses of £24.0m (2011: £25.0m) mainly reflect one-off costs associated with establishing common systems across UKAR(including a change in primary IT service provider), and redundancy costs and write-downs of assets following the announcement of the UKARrestructure and the phased exit from the Gosforth site.

Services provided by the Group’s auditors and network firmsDuring the year the Group obtained services from the Group’s auditors, as detailed below:

2012£m

2011£m

Fees payable to Company auditors for the audit of parent Company and consolidated accounts 0.2 0.3Fees payable to Company auditors and its associates for other services:- The audit of the Company’s subsidiaries pursuant to legislation 0.1 0.1- All other services (including regulatory) 0.1 0.1

Total 0.4 0.5

Amounts shown in the above analysis are exclusive of VAT.


33

7. Gain on repurchase of own liabilities

* The other net gains and losses were principally release of deferred coupons and hedge adjustment releases, less accelerated amortisation of the discountingeffect of deferral of coupons and fees.

The gain on repurchase of securitised notes, subordinated liabilities and other capital instruments is reported in the Income Statement as theseinstruments are accounted for as liabilities.

8. Taxation

2012 2011£m £m

The tax charge for the year comprises:

Current tax:- on profit for the year (13.4) (76.1)- adjustments in respect of prior years - 23.2- foreign tax - (2.0)

Total current tax (13.4) (54.9)

Deferred tax (see note 15)- origination and reversal of temporary differences (36.9) (46.6)- change in rate effective 1 April 2013/1 April 2012 on deferred tax items 1.9 0.5

Total deferred tax (35.0) (46.1)Total taxation charge per the Income Statement (48.4) (101.0)

The following tax amounts have been (charged)/credited to equity: 2012 2011£m £m

Current tax:- Relating to available-for-sale investments 0.9 (2.1)

Deferred tax:- Relating to cash flow hedge reserve (10.5) (25.3)- Relating to actuarial movements on retirement benefit obligations 14.3 (41.7)

Net charge to equity 4.7 (69.1)

The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the standard weighted average rate of UKcorporation tax of 24.5% (2011: 26.5%) as follows:

2012 2011£m £m

Profit before taxation 213.7 434.5

Tax calculated at rate of 24.5% (2011: 26.5%) (52.4) (115.1)

Effects of:Change in rate effective 1 April 2013/1 April 2012 on deferred tax items 1.9 0.5Expenses not deductible for tax purposes (3.5) (8.8)Adjustments in respect of prior years 5.6 22.4Total taxation charge for the year (48.4) (101.0)

Taxation appropriately reflects changes in tax rates which had been substantively enacted by 31 December 2012, as detailed in note 17.

2012Subordinated

liabilitiesOther capitalinstruments

Securitisednotes

TotalIncome

Statementgains

£m £m £m £m

Principal amount of liabilities repurchased 0.2 - 83.9 84.1Amount paid to repurchase liabilities (0.1) - (56.1) (56.2)Other net losses resulting from the repurchase* - - (0.3) (0.3)Gain on repurchase of own liabilities 0.1 - 27.5 27.6

2011 Subordinatedliabilities

Other capitalinstruments

Securitisednotes

TotalIncome

Statementgains

£m £m £m £m

Principal amount of liabilities repurchased 199.5 46.3 - 245.8Amount paid to repurchase liabilities (103.5) (30.8) - (134.3)Other net gains resulting from the repurchase* 30.6 8.9 - 39.5Gain on repurchase of own liabilities 126.6 24.4 - 151.0


34

9. Investment securities

Group Company2012 2011 2012 2011

£m £m £m £m

Available for-sale-securities 623.9 943.1 623.9 943.1Investment securities held as loans and receivables - - 300.5 300.5Total 623.9 943.1 924.4 1,243.6

In the Balance Sheet the carrying values of impaired assets are presented net of the impairment allowances shown in note 10.

(a) Available-for-sale securities Group Company2012 2011 2012 2011

£m £m £m £m

At fair value:Listed 623.9 943.1 623.9 943.1Total 623.9 943.1 623.9 943.1

The movement in available-for-sale securities was as follows:

At 1 January 943.1 1,673.1 943.1 1,673.1Disposals (sales and redemptions) (345.3) (736.7) (345.3) (736.7)Exchange differences (11.0) (7.3) (11.0) (7.3)Net gains on changes in fair value 37.1 14.0 37.1 14.0At 31 December 623.9 943.1 623.9 943.1

The net gains on changes in fair value include net impairment reversals.

No investment securities held as loans and receivables were impaired in 2012 or 2011.

10. Wholesale assets

The assets in the following tables are of a wholesale nature as opposed to individual customer assets. The credit and concentration riskcharacteristics of these portfolios should therefore be considered together.

Group Company2012 2011 2012 2011

£m £m £m £m

Balances with the Bank of England 841.3 884.6 841.3 884.4Cash at bank and in hand 2,252.0 1,386.7 1,192.2 572.6Investment securities (see note 9) 623.9 943.1 924.4 1,243.6Total 3,717.2 3,214.4 2,957.9 2,700.6

The Group and Company had no collateral or other credit enhancements in respect of these assets.

(b) Investment securities held as loans and receivables Group Company2012 2011 2012 2011

£m £m £m £m

Carrying value - - 300.5 300.5Fair value - - 300.5 300.5

Unlisted - - 300.5 300.5Total - - 300.5 300.5


35

10. Wholesale assets (continued)

(a) Credit risk

The credit quality of wholesale assets is set out in the table below:

At 31 December 2012Balances with

the Bank ofEngland

Cash at bankand in hand

Available-forsale securities Total

Group £m £m £m £m

Neither past due nor impaired 841.3 2,252.0 484.4 3,577.7Impaired - - 369.4 369.4

841.3 2,252.0 853.8 3,947.1Provisions - - (229.9) (229.9)Total 841.3 2,252.0 623.9 3,717.2


the Bank ofEngland


Available-for-sale securities Total

Group £m £m £m £m

Neither past due nor impaired 884.6 1,386.7 831.9 3,103.2Impaired - - 405.2 405.2

884.6 1,386.7 1,237.1 3,508.4Provisions - - (294.0) (294.0)Total 884.6 1,386.7 943.1 3,214.4

At 31 December 2012Balances

with the Bankof England



Investmentsecurities

held as loansand

receivables TotalCompany £m £m £m £m £m

Neither past due nor impaired 841.3 1,192.2 484.4 300.5 2,818.4Impaired - - 369.4 - 369.4

841.3 1,192.2 853.8 300.5 3,187.8Provisions - - (229.9) - (229.9)Total 841.3 1,192.2 623.9 300.5 2,957.9


the Bank ofEngland



Investmentsecurities

held as loans and

receivables TotalCompany £m £m £m £m £m

Neither past due nor impaired 884.4 572.6 831.9 300.5 2,589.4Impaired - - 405.2 - 405.2

884.4 572.6 1,237.1 300.5 2,994.6Provisions - - (294.0) - (294.0)Total 884.4 572.6 943.1 300.5 2,700.6


36


(a) Credit risk (continued)

The credit quality of wholesale assets by reference to credit ratings is set out in the table below:

At 31 December 2012AAA AA A BBB to B

CCC andbelow

Group £m % % % % %

Balances with the Bank of England 841.3 100 - - - -Cash at bank and in hand 2,252.0 - 77 21 1 1Investment securities:- available-for-sale securities 623.9 50 4 30 2 14

Total investment securities 623.9 50 4 30 2 14Total 3,717.2 31 48 17 1 3


CCC andbelow

Group £m % % % % %

Balances with the Bank of England 884.6 100 - - - -Cash at bank and in hand 1,386.7 - 93 7 - -Investment securities:- available-for-sale securities 943.1 70 10 13 1 6

Total investment securities 943.1 70 10 13 1 6Total 3,214.4 48 43 7 - 2


CCC andbelow

Company £m % % % % %

Balances with the Bank of England 841.3 100 - - - -Cash at bank and in hand 1,192.2 - 60 39 1 -Investment securities:- available-for-sale securities 623.9 50 4 30 2 14- loans and receivables 300.5 100 - - - -

Total investment securities 924.4 66 3 20 1 10Total 2,957.9 49 25 22 1 3


CCC and below

Company £m % % % % %

Balances with the Bank of England 884.4 100 - - - -Cash at bank and in hand 572.6 - 94 6 - -Investment securities:- available-for-sale securities 943.1 70 10 13 1 6- loans and receivables 300.5 100 - - - -

Total investment securities 1,243.6 77 8 10 1 4Total 2,700.6 68 24 6 - 2


37


(b) Concentration risk

Wholesale assets are analysed by geographical region at their carrying amounts in the table below:

At 31 December 2012 UK Europe US Othercountries

Total

Group £m £m £m £m £m

Balances with the Bank of England 841.3 - - - 841.3Cash at bank and in hand 2,252.0 - - - 2,252.0

Investment securities:- available-for-sale securities 306.1 283.5 7.9 26.4 623.9

Total investment securities 306.1 283.5 7.9 26.4 623.9Total 3,399.4 283.5 7.9 26.4 3,717.2


Total

Group £m £m £m £m £m


Investment securities:- available-for-sale securities 647.4 244.9 20.9 29.9 943.1



Total

Company £m £m £m £m £m


Investment securities:- available-for-sale securities 306.1 283.5 7.9 26.4 623.9- loans and receivables 300.5 - - - 300.5



Total

Company £m £m £m £m £m

Balances with the Bank of England 884.4 - - - 884.4Cash at bank and in hand 572.6 - - - 572.6

Investment securities:- available-for-sale securities 647.4 244.9 20.9 29.9 943.1- loans and receivables 300.5 - - - 300.5

Total investment securities 947.9 244.9 20.9 29.9 1,243.6Total 2,404.9 244.9 20.9 29.9 2,700.6

At 31 December 2012 and 31 December 2011 the Group and Company held no investment securities issued by the governments of Portugal,the Republic of Ireland, Italy, Greece or Spain.


38

11. Loans to customers

Group CompanyAt 31 December 2012 2011 2012 2011

£m £m £m £m

Residential mortgages 31,911.3 33,491.3 24,163.3 25,369.2Commercial loans 556.5 588.5 556.5 588.5Total secured loans 32,467.8 34,079.8 24,719.8 25,957.7Amounts due from subsidiary undertakings - - 7,590.8 8,246.2Total 32,467.8 34,079.8 32,310.6 34,203.9

Residential mortgages include all of the Group's buy-to-let loans. Commercial loans comprise loans secured on commercial properties.

All of the 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 £19,393.4m (31 December 2011: £20,246.2m) for the Group and Company which have beensold to bankruptcy remote SPVs whereby substantially all of the risks and rewards of the portfolio are retained by the Group/Company.Accordingly, all of these loans are retained on the Group's/Company's Balance Sheets. Further details are provided in note 22.

Fair value adjustments on portfolio hedging amounting to £341.4m (2011: £362.6m) relate to fair value adjustments to loans to customers inrelation 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 Redemptions Balances RedemptionsGroup At 31 December

2012 2012At 31 December

2011 2011

£m % £m £m % £mResidential mortgagesBuy-to-let 20,694.4 65 (646.4) 21,535.5 64 (710.7)Self Cert 6,561.8 20 (291.0) 6,902.4 21 (330.6)Standard and other 4,655.1 15 (394.5) 5,053.4 15 (454.7)Total residential mortgages 31,911.3 100 (1,331.9) 33,491.3 100 (1,496.0)Residential loans 31,911.3 98 (1,331.9) 33,491.3 98 (1,496.0)Commercial loans 556.5 2 (35.7) 588.5 2 (130.7)Total 32,467.8 100 (1,367.6) 34,079.8 100 (1,626.7)

Balances Redemptions Balances RedemptionsCompany At 31 December

2012 2012At 31 December

2011 2011

£m % £m £m % £mResidential mortgagesBuy-to-let 16,642.6 69 (500.5)

(224

17,291.1 68 (538.3)Self Cert 5,041.8 21 (224.5) 5,308.3 21 (254.0)Standard and other 2,478.9 10 (266.0) 2,769.8 11 (325.9)Total residential mortgages 24,163.3 100 (991.0) 25,369.2 100 (1,118.2)Residential loans 24,163.3 98 (991.0) 25,369.2 98 (1,118.2)Commercial loans 556.5 2 (35.7) 588.5 2 (130.7)Total 24,719.8 100 (1,026.7) 25,957.7 100 (1,248.9)

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


39

12. Impairment on loans to customers

Allowances for credit losses against loans to customers have been made as follows:

Group On residentialmortgages

On commercialloans Total

2012 £m £m £mAt 1 January 718.1 52.3 770.4Movements during the year:- Write-offs (175.8) - (175.8)- Loan impairment charge 95.3 (2.0) 93.3Net movements during the year (80.5) (2.0) (82.5)At 31 December 637.6 50.3 687.9The Income Statement charge comprises:- Loan impairment charge 95.3 (2.0) 93.3- Recoveries net of costs (30.8) (0.4) (31.2)Total Income Statement charge 64.5 (2.4) 62.1

Group On residentialmortgages


2011 £m £m £m

At 1 January 832.1 58.6 890.7Movements during the year:- Write-offs (196.5) (4.4) (200.9)- Loan impairment charge 82.5 (1.9) 80.6Net movements during the year (114.0) (6.3) (120.3)At 31 December 718.1 52.3 770.4The Income Statement charge comprises:- Loan impairment charge 82.5 (1.9) 80.6- Recoveries net of costs (1.2) - (1.2)Total Income Statement charge 81.3 (1.9) 79.4

CompanyOn residential

mortgagesOn commercial

loans Total

2012 £m £m £mAt 1 January 461.9 52.3 514.2Movements during the year:- Write-offs (93.2) - (93.2)- Loan impairment charge 27.9 (2.0) 25.9Net movements during the year (65.3) (2.0) (67.3)At 31 December 396.6 50.3 446.9The Income Statement charge comprises:- Loan impairment charge 27.9 (2.0) 25.9- Recoveries net of costs (11.2) (0.4) (11.6)Total Income Statement charge 16.7 (2.4) 14.3

Company On residentialmortgages


2011 £m £m £mAt 1 January 526.8 58.6 585.4Movements during the year:- Write-offs (108.5) (4.4) (112.9)- Loan impairment charge 43.6 (1.9) 41.7Net movements during the year (64.9) (6.3) (71.2)At 31 December 461.9 52.3 514.2The Income Statement charge comprises:- Loan impairment charge 43.6 (1.9) 41.7- Recoveries net of costs 0.9 - 0.9Total Income Statement charge 44.5 (1.9) 42.6

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


40

13. Credit quality of loans to customers

In respect of loans to residential customers, the Group and Company hold collateral in the form of mortgages over residential properties. Thefair value of this collateral was as follows:


£m £m £m £m

Neither past due nor impaired 41,467.9 43,342.3 32,389.8 34,027.0Past due but not impaired 1,815.6 2,239.5 1,223.8 1,496.0Impaired 362.9 556.4 192.8 282.7Total 43,646.4 46,138.2 33,806.4 35,805.7

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


£m £m £m £m

Neither past due nor impaired 29,972.9 31,097.0 22,973.7 23,965.0Past due but not impaired 1,515.7 1,882.1 981.1 1,205.1Impaired 335.7 515.7 174.4 255.4Total 31,824.3 33,494.8 24,129.2 25,425.5The impaired balances above include the following carryingamount of assets in possession, capped at the balanceoutstanding 71.2 69.0 44.2 39.4

The fair value of the collateral is estimated by taking the most recent valuation of the property and adjusting for house price inflation ordeflation 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:


% % % %To 50% 7.0 7.6 6.8 7.250% to 75% 18.1 16.5 19.4 18.175% to 100% 47.7 48.9 51.2 53.0Over 100% 27.2 27.0 22.6 21.7Total 100.0 100.0 100.0 100.0

For the Group, the average indexed loan to value based on a simple average is 74.6% (31 December 2011: 74.1%) and on a weightedaverage is 86.4% (31 December 2011: 86.2%).


41

13. Credit quality of loans to customers (continued)

At 31 December 2012 At 31 December 2011

Residentialmortgages

Commercialloans Total



Group £m £m £m £m £m £mNeither past due nor impaired 30,562.4 397.9 30,960.3 31,631.1 429.3 32,060.4Past due but not impaired:

- less than 3 months 1,053.2 - 1,053.2 1,204.4 - 1,204.4- 3 to 6 months 306.8 - 306.8 426.8 - 426.8- over 6 months 216.7 - 216.7 324.1 - 324.1

Impaired 409.8 208.9 618.7 623.0 211.5 834.532,548.9 606.8 33,155.7 34,209.4

.640.8 34,850.2

Impairment allowances (637.6) (50.3) (687.9) (718.1) (52.3) (770.4)Loans to customers net of impairmentallowances 31,911.3 556.5 32,467.8 33,491.3 588.5 34,079.8Impairment allowances:

- individual 122.2 50.3 172.5 179.1 52.3 231.4- collective 515.4 - 515.4 539.0 - 539.0

Total impairment allowances 637.6 50.3 687.9 718.1 52.3 770.4

At 31 December 2012 At 31 December 2011





Company £m £m £m £m £m £mNeither past due nor impaired 23,332.1 397.9 23,730.0 24,279.1 429.3 24,708.4Past due but not impaired:

- less than 3 months 699.8 - 699.8 800.9 - 800.9- 3 to 6 months 190.3 - 190.3 265.1 - 265.1- over 6 months 123.6 - 123.6 177.6 - 177.6

Impaired 214.1 208.9 423.0 308.4 211.5 519.924,559.9 606.8 25,166.7 25,831.1 640.8 26,471.9

Impairment allowances (396.6) (50.3) (446.9) (461.9) (52.3) (514.2)LLoans to customers net of impairment

allowances 24,163.3 556.5 24,719.8 25,369.2 588.5 25,957.7Impairment allowances:

- individual 66.3 50.3 116.6 87.8 52.3 140.1- collective 330.3 - 330.3 374.1 - 374.1

Total impairment allowances 396.6 50.3 446.9 461.9 52.3 514.2

'Impaired' loans are those which are 12 months or more in arrears, in possession or held for sale with an LPA receiver, and others whichmanagement 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 dueto renegotiation; these were loans where arrears were capitalised during the year. These loans amounted to £7.5m (2011: £35.0m) for theGroup and £4.8m (2011: £20.8m) for the Company. A loan is eligible for capitalisation of arrears only once the borrower has complied withstringent terms for a set period.

The Group also offers other forbearance methods to borrowers, subject to compliance with loan terms, the aim of these being to assist theborrower to reduce the level of arrears. Management have taken into consideration the forbearance options in applying loan default probabilitiesand in their overall assessment of the total impairment provision.


42


Arrears and possessions are monitored for the Group as a whole, and also split by type of product.

Arrears and possessions on residential mortgages

At 31 December2012

At 31 December2011

Arrears 3 months and overNumber of cases No. 5,197 8,180Proportion of total cases % 1.85 2.74Asset value £m 760.7 1,212.3Proportion of book % 2.38 3.62Total value of payments overdue £m 23.1 38.6Proportion of total book % 0.07 0.11

PossessionsNumber of cases No. 717 587Proportion of total cases % 0.25 0.20Asset value £m 108.2 96.0Proportion of book % 0.34 0.29Total value of payments overdue £m 4.7 6.1Proportion of total book % 0.02 0.02New possessions No. 1,760 1,702

Total arrears 3 months and over and possessionsNumber of cases No. 5,914 8,767Proportion of total cases % 2.10 2.94Asset value £m 869.0 1,308.3Proportion of book % 2.72 3.91Total value of payments overdue £m 27.8 44.7Proportion of total book % 0.09 0.13

In respect of all arrears (including those which are less than 3 months in arrears) together with possessions, the total value of paymentsoverdue as at 31 December was:

Payments overdueTotal value of payments overdue £m 34.6 52.6Proportion of total book % 0.11 0.16

Loan impairment provisionAs % of residential balances % 1.96 2.10


43


Analysis of residential mortgages 3 months and over in arrears by product

At 31 December2012

At 31 December2011

Buy-to-let Number of cases No. 2,206 4,127 Proportion of total cases % 1.24 2.25 Asset value £m 319.3 614.6 Proportion of book % 1.54 2.85 Total value of payments overdue £m 10.2 19.9 Proportion of total book % 0.05 0.09

Self Cert Number of cases No. 1,563 2,080 Proportion of total cases % 3.60 4.59 Asset value £m 273.4 362.3 Proportion of book % 4.17 5.25 Total value of payments overdue £m 7.2 10.4 Proportion of total book % 0.11 0.15

Standard and other Number of cases No. 1,428 1,973 Proportion of total cases % 2.36 2.84 Asset value £m 168.1 235.4 Proportion of book % 3.61 4.66 Total value of payments overdue £m 5.7 8.3 Proportion of total book % 0.12 0.16

14. Investments in Group undertakingsCompany

2012 2011£m £m

At 1 January 991.2 1,111.2Repayment of capital - (120.0)At 31 December 991.2 991.2

Investments comprise:Shares 188.7 188.7Loans 802.5 802.5Total 991.2 991.2

Certain subsidiaries returned surplus capital to the Company in 2011. The Directors consider the value of investments to be supported bytheir underlying assets. The Company's principal subsidiaries at 31 December 2012 are listed below, each of which operates in its country ofincorporation.

Bradford & Bingley Investments and Mortgage Express are unlimited companies.

Class of shares held Interest Nature of business

Country of

incorporation

Direct

Bradford & Bingley Investments Ordinary 100% Holding company UK

Indirect

Mortgage Express Ordinary 100% Mortgage administration UK


44

14. Investments in Group undertakings (continued)

SPVs

The following entities are SPVs established in connection with the Group's securitisation and secured funding programmes (see note 22).Although the Company has no direct or indirect ownership interest in these entities, they are regarded as subsidiaries. This is because they areprincipally engaged in providing a source of long-term funding to the Group, which in substance has the rights to all benefits from the activities ofthe SPVs. They are therefore effectively controlled by the Group. The Company is a member of Bradford & Bingley Covered Bonds LLP.

Nature of business Country of incorporation

Aire Valley Mortgages 2004-1 plc Issue of securitised notes UKAire Valley Mortgages 2005-1 plc Issue of securitised notes UKAire Valley Mortgages 2006-1 plc Issue of securitised notes UKAire Valley Mortgages 2007-1 plc Issue of securitised notes UKAire Valley Mortgages 2007-2 plc Issue of securitised notes UKAire Valley Mortgages 2008-1 plc Issue of securitised notes UKBradford & Bingley Covered Bonds LLP Mortgage funding UK

The Directors consider that to give full particulars of all subsidiaries would lead to a statement of excessive length. A full list of subsidiaries at 31December 2012 will be annexed to the Company's next Annual Return to be filed at Companies House.

15. Deferred taxation

The net deferred taxation asset/(liability) is attributable to the following:

Assets Liabilities NetGroupAt 31 December

2012£m

2011£m

2012£m

2011£m

2012£m

2011£m

Changes in accounting basis on adoption ofIFRS

2.9 6.3 (4.5) (8.5) (1.6) (2.2)

Cash flow hedges - - (26.0) (15.5) (26.0) (15.5)Accelerated tax depreciation - 4.7 (0.4) - (0.4) 4.7Available-for-sale reserve and fair value - - (8.6) (5.8) (8.6) (5.8)Employee benefits 17.1 6.5 - - 17.1 6.5Taxation value of losses carried forward 22.5 46.5 - - 22.5 46.5

42.5 64.0 (39.5) (29.8) 3.0 34.2Offset (39.5) (29.8) (39.5) 29.8 - -Total 3.0 34.2 - - 3.0 34.2

No deferred tax assets were unrecognised at 31 December 2012. At 31 December 2011, £2.6m of deferred tax assets were unrecognised,relating to unused tax losses of £10.3m. £22.5m (2011: £46.5m) of deferred tax assets have been recognised in respect of tax losses carriedforward; based upon detailed business plans, there will be sufficient taxable profits in future years to utilise the losses on which deferred tax hasbeen recognised.

Assets Liabilities NetCompanyAt 31 December

2012£m

2011£m

2012£m

2011£m

2012£m

2011£m

Changes in accounting basis on adoption ofIFRS

2.6 3.8 (4.5) (6.5) (1.9) (2.7)

Cash flow hedges - - (26.0) (15.5) (26.0) (15.5)Accelerated tax depreciation - 4.7 (0.5) - (0.5) 4.7Employee benefits 17.1 6.5 - - 17.1 6.5

19.7 15.0 (31.0) (22.0) (11.3) (7.0)Offset (19.7) (15.0) 19.7 15.0 - -Total - - (11.3) (7.0) (11.3) (7.0)

There were no deferred tax assets unrecognised at 31 December 2012 or 31 December 2011.


45

15. Deferred taxation (continued)

The movements in the Group's temporary differences in the year and previous year were as follows:

Group At 1 January2012

Recognisedin income

Recognisedin equity

At 31 December2012

£m £m £m £m

Changes in accounting basis on adoption of IFRS (2.2) 0.6 - (1.6)Cash flow hedges (15.5) - (10.5) (26.0)Accelerated tax depreciation 4.7 (5.1) - (0.4)Available-for-sale reserve and fair value (5.8) (2.8) - (8.6)Employee benefits 6.5 (3.7) 14.3 17.1Taxation value of losses carried forward 46.5 (24.0) - 22.5Total 34.2 (35.0) 3.8 3.0

GroupAt 1 January

2011Recognised

in incomeRecognised

in equityAt 31 December

2011£m £m £m £m

Changes in accounting basis on adoption of IFRS (3.0) 0.8 - (2.2)Cash flow hedges 9.8 - (25.3) (15.5)Accelerated tax depreciation 6.0 (1.3) - 4.7Available-for-sale reserve and fair value (6.5) 0.7 - (5.8)Employee benefits 53.0 (4.8) (41.7) 6.5Taxation value of losses carried forward 88.0 (41.5) - 46.5Total 147.3 (46.1) (67.0) 34.2

The movements in the Company's temporary differences in the year and previous year were as follows:

Company At 1 January2012

Recognisedin income

Recognisedin equity

At 31 December2012

£m £m £m £mChanges in accounting basis on adoption of IFRS (2.7) 0.8 - (1.9)Cash flow hedges (15.5) - (10.5) (26.0)Accelerated tax depreciation 4.7 (5.2) - (0.5)Employee benefits 6.5 (3.7) 14.3 17.1Total (7.0) (8.1) 3.8 (11.3)

CompanyAt 1 January

2011Recognised

in incomeRecognised

in equityAt 31 December

2011£m £m £m £m

Changes in accounting basis on adoption of IFRS (3.7) 1.0 - (2.7)Cash flow hedges 9.8 - (25.3) (15.5)Accelerated tax depreciation 6.0 (1.3) - 4.7Employee benefits 53.0 (4.7) (41.8) 6.5Total 65.1 (5.0) (67.1) (7.0)

Deferred tax appropriately reflects the change to the standard rate of UK corporation tax to 23% with effect from 1 April 2013. The announcedfurther rate reductions to 20% with effect from 1 April 2015 would have the maximum potential impact of reducing the Group’s deferred tax assetsby approximately £5.5m (Company: £2.6m).

16. Other assets

Group Company2012 2011 2012 2011

£m £m £m £m

Prepayments and accrued income 4.5 6.2 4.5 6.2Other 56.4 29.8 54.2 29.3Total 60.9 36.0 58.7 35.5

Other assets include £49.2m (2011: £28.7m) due from NRAM.


46

17. Property, plant and equipment

GroupLand andbuildings

Plant, equipment,fixtures, fittings and

vehicles Total2012 £m £m £m

CostAt 1 January 2012 23.1 65.0 88.1Additions - 4.5 4.5Disposals - (0.3) (0.3)At 31 December 2012 23.1 69.2 92.3

DepreciationAt 1 January 2012 14.6 49.6 64.2Charged in year 0.3 3.2 3.5Disposals - (0.2) (0.2)At 31 December 2012 14.9 52.6 67.5

Net book amount:At 1 January 2012 8.5 15.4 23.9At 31 December 2012 8.2 16.6 24.8

GroupLand andbuildings




DepreciationAt 1 January 2011 14.2 43.3 57.5Charged in year 0.4 1.3 1.7Accelerated depreciation - 5.0 5.0At 31 December 2011 14.6 49.6 64.2


At 31 December 2012, work in progress of £2.0m (2011: £8.2m) has been capitalised and is not being depreciated. During 2012, £8.2m of workin progress held at 31 December 2011 (2011: £8.5m), and £2.5m of additions in 2012 (2011: £4.6m) has begun depreciating. The work inprogress relates to an IT investment programme to simplify existing infrastructure and reduce ongoing costs.

Accelerated depreciation in 2011 related to IT assets which will no longer be of use to the business following the decision to change IT serviceprovider.

Sale proceeds from asset disposals were £0.1m (2011: £0.3m) resulting in a profit on sale of £nil (2011: £nil).


47

17. Property, plant and equipment (continued)

CompanyLand andbuildings




DepreciationAt 1 January 2012 14.6 49.6 64.2Charged in year 0.3 3.2 3.5Disposals - (0.2) (0.2)At 31 December 2012 14.9 52.6 67.5


CompanyLand andbuildings



CostAt 1 January 2011 23.1 52.8 75.9Additions - 12.1 12.1At 31 December 2011 23.1 64.9 88.0

DepreciationAt 1 January 2011 14.2 43.3 57.5Charged in year 0.4 1.3 1.7Accelerated depreciation - 5.0 5.0At 31 December 2011 14.6 49.6 64.2


At 31 December 2012, work in progress of £2.0m (2011: £8.2m) has been capitalised and is not being depreciated. During 2012, £8.2m of workin progress held at 31 December 2011 (2011: £8.5m), and £2.5m of additions during 2012 (2011: £4.6m) has begun depreciating. The work inprogress relates to an IT investment programme to simplify existing infrastructure and reduce ongoing costs.

Accelerated depreciation in 2011 related to IT assets which will no longer be of use to the business following the decision to change IT serviceprovider.

Sale proceeds from asset disposals were £nil (2011: £nil) resulting in a profit on sale of £nil (2011: £nil).

18. Intangible assetsGroup Company

2012 £m £m

CostAt 1 January 2012 57.2 55.5Additions 20.0 20.0Disposals (3.2) (3.2)At 31 December 2012 74.0 72.3

AmortisationAt 1 January 2012 23.9 22.2Charged in year 7.1 7.1Disposals (3.2) (3.2)At 31 December 2012 27.8 26.1

Net book amount:At 1 January 2012 33.3 33.3At 31 December 2012 46.2 46.2


48

18 Intangible assets (continued)

Group Company2011 £m £m

CostAt 1 January 2011 29.9 28.2Additions 30.1 30.1Disposals (2.8) (2.8)At 31 December 2011 57.2 55.5

AmortisationAt 1 January 2011 26.6 24.9Charged in year 0.1 0.1Disposals (2.8) (2.8)At 31 December 2011 23.9 22.2

Net book amount:At 1 January 2011 3.3 3.3At 31 December 2011 33.3 33.3

Intangible assets comprise capitalised software.

At 31 December 2012, work in progress of £4.1m (2011: £32.8m) has been capitalised and is not being amortised. During 2012, £32.8m ofwork in progress held at 31 December 2011 (2011: £0.2m) and £15.9m of additions in 2012 (2011: £0.4m) has begun amortising. The work inprogress relates to an IT investment programme to simplify existing infrastructure and reduce ongoing costs.

Proceeds of disposals were £nil (2011: £nil) resulting in a profit on disposal of £nil (2011: £nil).

19. Amounts due to banks

Group Company2012 2011 2012 2011

At 31 December £m £m £m £mCash collateral received 1,221.0 391.6 605.4 33.1Other 0.2 2.1 0.2 2.1Total 1,221.2 393.7 605.6 35.2

20. Other deposits

Group Company2012 2011 2012 2011

At 31 December £m £m £m £mAmounts due to securitisation SPVs - - 3,710.3 4,109.4Amounts due to other subsidiaries - - 933.5 1,105.1Total - - 4,643.8 5,214.5

Amounts due to securitisation SPVs represent the beneficial interests held in mortgage portfolios by securitisation SPVs (see note 22). Becausethe mortgage loans do not qualify for derecognition from the Company's Balance Sheet, the securitisation SPVs' beneficial interests in themortgage portfolios are represented by a deemed loan to the Company. This is equivalent in value to the beneficial interests in the mortgageportfolios plus associated intra-Group balances directly relating to the beneficial interests in the mortgage portfolios.

21. Statutory Debt and HM Treasury loans

Group and Company 2012 2011£m £m

Statutory Debt 18,416.2 18,416.2HM Treasury Working Capital Facility 7,008.0 8,439.6Total 25,424.2 26,855.8

The Company has an interest-free Statutory Debt of £18,416.2m as at 31 December 2012 and 31 December 2011. This replaced the Group'ssavings-related assets and liabilities which were transferred to Banco Santander Group on 29 September 2008. £15,654.5m of the StatutoryDebt is owed to the Financial Services Compensation Scheme ('FSCS'). At the time of the nationalisation of B&B, the FSCS covered the first£35,000 per depositor; HMT agreed to cover the excess over £35,000, amounting to a total of £2,761.7m. It is expected that the Statutory Debtwill be repaid out of the cash flows generated by B&B during its wind-down. These cash flows will principally comprise interest and redemptionsarising on loans to customers. The redemption profile of loans to customers is uncertain; many of these loans have contractual maturities of 25years or more from the date of advance, but experience has been that most loans to customers redeem earlier than their contractual maturitydates. Consequently, the timing of the repayment of the Statutory Debt is uncertain.


49

21. Statutory Debt and HM Treasury loans (continued)

The Company has an interest-bearing Working Capital Facility ('WCF') provided by HM Treasury. Since 1 August 2011 the rate charged hasbeen Bank of England Base Rate + 500bps, and prior to that date the rate was Bank of England Base Rate + 150bps. HM Treasury has theoption to vary the rate charged. At 31 December 2012 the Company had drawn £6,975.0m (2011: £8,400.0m) of this facility; £7,008.0mincluding accrued interest (2011: £8,439.6m). At the signing date of these Financial Statements, HM Treasury has confirmed its intentions tocontinue to fund the Company as a going concern, and to enable the Company to meet its debts as and when they fall due, until at least 1November 2014. HM Treasury has indicated that it expects the WCF to be repaid out of the cash flows generated by B&B during its wind-down.These cash flows will principally comprise interest and redemptions arising on loans to customers. The redemption profile of loans to customersis uncertain; many of these loans have contractual maturities of 25 years or more from the date of advance, but experience has been that mostloans to customers redeem earlier than their contractual maturity dates. Consequently, the timing of the repayment of the WCF is uncertain.

22. Debt securities in issue

Securitised notes Covered Bonds Other TotalGroup £m £m £m £m

At 1 January 2012 4,823.7 3,990.3 691.5 9,505.5Repayments (367.8) (190.3) (199.6) (757.7)Repurchase (83.9) - - (83.9)Other movements (95.7) (197.7) (32.6) (326.0)At 31 December 2012 4,276.3 3,602.3 459.3 8,337.9

Securitised assets 10,402.9 8,990.5 - 19,393.4

Securitised notes Covered Bonds Other TotalGroup £m £m £m £m

At 1 January 2011 5,272.9 4,977.6 2,297.2 12,547.7Repayments (352.3) (744.9) (1,603.6) (2,700.8)Other movements (96.9) (242.4) (2.1) (341.4)At 31 December 2011 4,823.7 3,990.3 691.5 9,505.5

Securitised assets 10,838.2 9,408.0 - 20,246.2

Securitised notes Covered Bonds Other TotalCompany £m £m £m £m

At 1 January 2012 - 3,990.3 691.6 4,681.9Repayments - (190.3) (199.6) (389.9)Other movements - (197.7) (32.7) (230.4)At 31 December 2012 - 3,602.3 459.3 4,061.6

Securitised assets - 8,990.5 - 8,990.5

Securitised notes Covered Bonds Other TotalCompany £m £m £m £m

At 1 January 2011 - 4,977.6 2,297.2 7,274.8Repayments - (744.9) (1,603.6) (2,348.5)Other movements - (242.4) (2.0) (244.4)At 31 December 2011 - 3,990.3 691.6 4,681.9

Securitised assets - 9,408.0 - 9,408.0

During the year the Company purchased securitised notes which had been issued by certain of the Group's securitisation vehicles, generating aprofit of £27.5m, as shown in note 7.

Other movements comprise exchange rate movements, accrued interest and hedge accounting adjustments.

The Group issued debt securities to securitise loans to customers through SPVs and Covered Bonds, 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 inrespect of the notes that were hedged.

HM Treasury has provided guarantees with regard to certain wholesale borrowings of the Company; the Group pays a fee for these guarantees asdetailed in note 3.


50

22. Debt securities in issue (continued)

(a) Securitised notes

The Group's results include the results and assets and liabilities of securitisation SPVs, none of which qualify for derecognition under IAS 39, on aline-by-line basis. Securitised assets are subject to non-recourse finance arrangements. These assets are loans to customers, which have beenpurchased at par from the Company, the purchase being funded through the issue by the SPVs of mortgage-backed bonds. The Companypasses to the SPVs cash received in relation to the securitised assets. The SPVs use the cash to service the bonds, retain a margin specifiedunder the terms of the issue, and return any surplus cash to the Company. To the extent that the total cash receipts in relation to the securitisedassets are insufficient to satisfy interest and principal payments in relation to the bonds, the holders of the bonds have no recourse against theGroup. Provided that the total cash receipts in relation to the securitised assets are sufficient to satisfy interest and principal payments in relationto the bonds, the Company bears the cost of any impairment of the securitised assets. While the assets remain securitised, the Group may notuse, sell or pledge these assets.

At 31 December 2012 the SPVs had cash deposits (including accrued interest) amounting to £1,046.6m, including collateral deposits of £615.6m(2011: £777.9m, including collateral deposits of £358.5m). These deposits (excluding the collateral deposits) are restricted in use to therepayment of the debt securities issued by the SPVs and other legal obligations.

Many of the securitised notes are issued in foreign currency. These are translated into sterling at exchange rates prevailing at 31 December. Allissuance in foreign currency is subject to cross currency swaps that provide the amounts of foreign currency required to repay the notes inexchange for an amount of sterling fixed at the issue of the note, thereby protecting against foreign exchange risk. The value of the loansassigned to the bankruptcy-remote SPVs exceeds the value of sterling required under the foreign exchange swaps, and therefore the debtsecurities in issue are more than covered by loan assets allocated for this purpose.

On 10 May 2012 a Non-Asset Trigger Event (as defined in the Offering Circular) occurred within the Group's Master Trust securitisation structure,due to the aggregate current balance of loans comprising the Trust Property falling below the minimum trust size of £10.7bn. The impact of thisevent is to change the order of priority of the Funding 1 Available Principal Receipts. As a result of the Non-Asset Trigger Event, all principalreceipts from customers are allocated to Funding 1 and will continue to be so allocated until all holders of Aire Valley residential mortgage-backedsecurities have been repaid in full if sufficient funds are available. The principal is then passed to the Issuers based on their respective notesoutstanding. Each Issuer then utilises this principal to pay down notes pro-rata and sequentially by class. The timing of future redemptions will bedependent on the availability of funds.

On 19 June 2012 the Company announced tender offers in respect of the securities issued by the Master Trust. The tender process closed on 4July 2012, resulting in the purchase of notes with a face value of £83.9m (see note 7).

(b) Covered Bonds

Included within loans to customers are £8,990.5m (2011: £9,408.0m) of mortgage advances which provide security to issues of Covered Bondsmade by the Company, amounting to £3,602.3m (2011: £3,990.3m). The Company passes to Bradford & Bingley Covered Bonds LLP cashreceived in relation to the securitised assets. Bradford & Bingley Covered Bonds LLP uses cash receipts to service the bonds, and returns anysurplus cash to the Company. The Company bears the cost of any impairment of the securitised assets. While the assets remain securitised, theGroup may not use, sell or pledge these assets.

Many of the Covered Bonds are issued in foreign currency. These are translated into sterling at exchange rates prevailing at 31 December. Allissuance in foreign currency is subject to cross currency swaps that provide the amounts of foreign currency required to repay the Bonds inexchange for an amount of sterling fixed at the issue of the Bond, thereby protecting against foreign exchange risk. The value of the loansassigned to the bankruptcy-remote Covered Bond exceeds the value of sterling required under the foreign exchange swaps, and therefore thedebt securities in issue are more than covered by loan assets allocated for this purpose.

(c) Other debt securities in issue

Other debt securities in issue comprise notes issued under the Company's Medium Term Notes programme.

23. Other liabilities

Group Company2012 2011 2012 2011

At 31 December £m £m £m £m

Accruals and deferred income 48.0 38.3 46.6 36.3Other 55.8 60.4 52.6 57.9Total 103.8 98.7 99.2 94.2

24. Retirement benefit obligations

(a) Pension schemes

The Group operated a defined benefit staff pension scheme, the Bradford & Bingley Staff Pension Scheme ('the principal scheme'), which wasadministered by 'the Trustees'. On 31 December 2009 the scheme was closed to future service accrual and all members became deferredmembers and were given the option to transfer to the Group defined contribution scheme from 1 January 2010. The assets of the principalscheme are held in a separate trustee-administered fund. The normal pension age of employees in the principal scheme is 65.

The Group also operates a defined contribution scheme, the Bradford & Bingley Group Pension Plan. The assets of this scheme areindependent from those of the Group. The Group and Company had no liabilities or prepayments associated with this scheme at 31 December2012 (2011: £nil). The cost in the year to the Group of this scheme was £1.4m (2011: £1.3m).


51

24. Retirement benefit obligations (continued)

(b) Other post-retirement benefits

The Group provides healthcare benefits to some of its pensioners. The healthcare benefits are provided through a post-retirement medicalscheme into which the Company contributes 100% towards the cost of providing medical expense benefits for members who retired before 1January 1996 and 50% for members who retired after this date. The total number of members of the scheme at 31 December 2012 was 323(2011: 336). Private medical costs are assessed in accordance with the advice of a qualified actuary.

(c) Accounting treatment

The Group accounts for post-retirement benefit costs in accordance with IAS 19 'Employee Benefits' and IFRIC 14 'IAS 19 - The Limit on aDefined Benefit Asset, Minimum Funding Requirements and their Interaction'. For 2013, the Group and Company will adopt the revisions to IAS19 which were issued in June 2011 and adopted for use in the EU in June 2012. The main effect on the Group and Company of the revisions toIAS 19 is that instead of an expected rate of return being applied to defined benefit plan assets, the discount rate previously applied to definedbenefit plan obligations will instead be applied to the net surplus or deficit on the plan. The full net deficit is carried on the Group and CompanyBalance Sheets, and gains and losses arising due to actuarial revaluations and adjustments to reflect the funding plan commitments are taken toGroup and Company other comprehensive income rather than being credited or charged in the Income Statement.

The Company is committed to a funding plan to address the deficit on the defined benefit plan, and in July 2010 the Company committed tomake contributions of £16m per annum increasing at 10% pa for 10 years, commencing in 2010. The schedule of contributions has been re-considered and the Company expects to make a contribution of £32m in June 2013. In accordance with IFRIC 14, the net pension deficit whichis recognised on the Balance Sheet is the higher of the deficit calculated under IAS 19 and the net present value of the committed funding.However, to the extent that the Company has a clear unconditional right to a refund of future surpluses which may arise in the plan, the carryingvalue of the deficit should be reduced to take account of the anticipated future available refunds. In March 2011 the Trustees finalised aresolution under Section 251(3) of the Pensions Act 2004 for the ultimate refund to the Company of any future surpluses on the plan. At 31December 2010, this resolution not yet being in effect, the funding plan reduced retained earnings by £117.6m.

At 31 December 2010 the inflation assumption used to determine benefit obligations was based on the Retail Prices Index ('RPI'), pendingfulfilment of conditions which would need to be satisfied in order for the proposed change to a Consumer Prices Index ('CPI') basis to come intoeffect in respect of deferred members. The conditions were satisfied during 2011, and consequently CPI has been applied with effect from 1January 2011. Consequently the net pension liability carried on the Balance Sheet reduced at that time by a credit to other comprehensiveincome.

The actuarial loss recognised in Group and Company other comprehensive income during the year was £64.3m (2011: gain £34.0m) andretained earnings also increased in 2011 by £117.6m as a result of the passing of the resolution regarding the refund of surpluses. Thecumulative actuarial loss recognised in the Group and Company since transition to IFRS on 1 January 2004 is £99.3m (2011: £35.0m).

More than one employing Group entity contributes to the retirement benefit schemes. As there is no contractual agreement or stated policy forcharging the net defined benefit cost to individual Group entities, the net defined benefit cost is recognised in the Financial Statements of theCompany (being the sponsoring entity). Other Group entities, in their individual financial statements, recognise a cost equal to their contributionspayable for the period.

(d) Defined benefit section of the scheme

The amounts carried on the Group and Company Balance Sheets are as follows:

Defined benefitpension plans

Post-retirementmedical benefits Total

2012 2011 2012 2011 2012 2011£m £m £m £m £m £m

Present value of defined benefitobligations

(730.8) (663.7) (9.6) (9.9) (740.4) (673.6)

Fair value of defined benefit assets 669.9 649.0 - - 669.9 649.0Net defined benefit liability (60.9) (14.7) (9.6) (9.9) (70.5) (24.6)

The amounts recognised in the Group Income Statement were as follows:

The actual return on defined benefit assets for the year was £20.3m (2011: £65.8m).



2012 2011 2012 2011 2012 2011£m £m £m £m £m £m

Interest on defined benefit obligations 30.8 34.0 0.5 0.5 31.3 34.5Expected return on defined benefit assets (29.9) (34.4) - - (29.9) (34.4)Net cost/(credit) 0.9 (0.4) 0.5 0.5 1.4 0.1


52


(d) Defined benefit section of the scheme (continued)

Movements in the present value of defined benefit obligations were as follows:



2012 2011 2012 2011 2012 2011£m £m £m £m £m £m

At 1 January 663.7 650.7 9.9 9.0 673.6 659.7Interest on defined benefit obligations 30.8 34.0 0.5 0.5 31.3 34.5Actuarial loss/(gain) 55.2 (3.3) (0.5) 0.7 54.7 (2.6)Benefits paid (18.9) (17.7) (0.3) (0.3) (19.2) (18.0)At 31 December 730.8 663.7 9.6 9.9 740.4 673.6

Movements in the fair value of defined benefit assets were as follows:

The Group expects to contribute £32.0m to its defined benefit pension plan in 2013, to address the deficit on the plan.

The major categories of defined benefit assets as a percentage of total defined benefit assets at 31 December were as follows:

(e) Assumptions

Summary actuarial assumptions (expressed as weighted averages) were as follows:

2012 2011

To determine benefit obligations:Discount rate at 31 December 4.5% 4.7%Inflation (RPI) 3.0% 3.0%Inflation (CPI) 2.4% 2.3%Future pension increases 2.9% 2.9%To determine net pension cost:Expected return on plan assets 4.6% 5.9%Discount rate 4.7% 5.3%For post-retirement medical planDiscount rate 4.5% 4.7%Medical cost trend for duration of liability 6.1% 5.2%

In determining the expected long-term return on defined benefit assets, the Company considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of risk premium associated with the other asset classes in which the portfoliois invested and the expectations for future returns on each asset class. The expected return for each asset class was then weighted based onthe target asset allocation to develop the expected long-term return for the portfolio.

Defined benefit Post-retirementpension plans medical benefits Total

2012 2011 2012 2011 2012 2011£m £m £m £m £m £m

At 1 January 649.0 583.2 - - 649.0 583.2Expected return on defined benefit assets 29.9 34.4 - - 29.9 34.4Defined benefit company contributions 19.4 17.6 0.3 0.5 19.7 18.1Actuarial (loss)/gain (9.6) 31.4 - - (9.6) 31.4Benefits paid (18.8) (17.6) (0.3) (0.5) (19.1) (18.1)At 31 December 669.9 649.0 - - 669.9 649.0

2012 2011Equities 25% 23%Property 6% 8%Bonds 45% 40%Gilts 18% 19%Cash and other 6% 10%Total 100% 100%


53


(e) Assumptions (continued)

The table below shows the life expectancy assumptions from age 60:

2012 2011Pensioner Non-retired

memberPensioner Non-retired

memberMale 28.3 29.8 27.3 28.9Female 31.0 32.6 30.2 31.8

The basis of estimation of life expectancy was changed during the year to use of data which is believed closer to reflect the characteristics of themembership of the plan.

The table below illustrates the 5 year history of experience gains and losses for the defined benefit pension plan:

2012 2011 2010 2009 2008£m £m £m £m £m

Defined benefit obligations (730.8) (663.7) (650.7) (615.1) (480.5)Fair value of assets 669.9 649.0 583.2 525.2 485.3IFRIC 14 restriction - - (117.6) - (4.8)Deficit (60.9) (14.7) (185.1) (89.9) -Experience (loss)/gain on liabilities (55.2) 3.3 (22.4) (132.6) 101.5Experience (loss)/gain on assets (9.6) 31.4 31.2 21.3 (115.7)

(f) Sensitivity

The following table illustrates the sensitivity of the net defined benefit pension scheme obligations to three key assumptions: the discount rate,the rate of inflation and the mortality assumption:

Assumption Change in assumption Impact on net obligationsDiscount rate Decrease by 0.5% Increase by 11%Inflation Increase by 0.5% Increase by 11%Mortality Decrease by 1 year Increase by 2%

If the assumptions were to change by the same amount in the opposite direction to those illustrated, the net benefit obligations would decreaseby a similar percentage to those shown in the table in each case.

Assumed healthcare cost trend rates have an effect on the amounts recognised in staff costs. A one percentage point change in assumedhealthcare cost trend rates would have the following effects:

2012 2011£m £m

Effect on interest cost 0.1 0.1Effect on defined benefit obligations 1.5 1.3

25. Provisions

Customer redress

Onerouscontracts Restructuring Total

Group and Company £m £m £m £m

At 1 January 2012 17.5 1.1 29.1 47.7Utilised in the year (7.5) (0.7) (13.3) (21.5)Charged in the year 12.0 - 34.7 46.7At 31 December 2012 22.0 0.4 50.5 72.9

Customerredress

Onerouscontracts Restructuring Total

Group and Company £m £m £m £m

At 1 January 2011 20.6 5.4 8.5 34.5Utilised in the year (3.5) (4.3) (4.0) (11.8)Charged in the year 0.4 - 26.1 26.5Released in the year - - (1.5) (1.5)At 31 December 2011 17.5 1.1 29.1 47.7


54

25. Provisions (continued)

The provision for customer redress relates to potential claims for compensation from customers in respect of the sale of Payment ProtectionInsurance ('PPI'), endowment and other regulated products sold in the past by the Group's independent advisory business. This business was soldin December 2004 following a strategic review. The provision is calculated on the basis of a reasonable estimate of the size and expected timing ofclaims. It is not possible to give a precise indication of the timing or amount of future payments as external factors such as the performance of thestock market could have a significant impact. The provision includes £6.1m in respect of PPI. Based on current evidence, the Company considersthe provision for customer redress to be adequate.

The onerous contracts provision relates to empty leasehold premises which, as at the Balance Sheet date, were no longer used by the business,but were subject to a lease agreement. The rental payments are due to be made during the period until 2015.

During the year restructuring costs of £32.6m have been provided in relation to the change in primary IT service provider, and £2.1m for the costsassociated with the phased exit from the Gosforth site. Payments are expected to be made during 2013.

26. Capital instruments

At 31 December 2012 At 31 December 2011Group and Company Initial

interestrate

First due or callable

Finalmaturity

Carryingamount

£mPrincipal

£m

Carryingamount

£mPrincipal

£m

Dated subordinated notes 7.625% 2010 2049 16.1 12.2 15.2 12.4Dated fixed rate step-upsubordinated notes

5.50% 2018 2018 5.4 4.4 5.2 4.4

Callable perpetual subordinatednotes

5.625% 2013 Undated 21.5 18.1 20.8 18.1

Callable perpetual subordinatednotes

6.00% 2019 Undated 23.1 20.0 21.9 20.0

Undated perpetual subordinatedbonds

13.00% Perpetual Undated 42.6 41.5 35.8 41.5

Undated perpetual subordinatedbonds

11.625% Perpetual Undated 37.5 35.7 32.2 35.7

Total 146.2 131.9 131.1 132.1

The subordinated liabilities are all denominated in sterling.

The carrying values of these instruments are on an EIR basis which takes into account issue costs. The carrying value of individually hedged itemsalso includes hedge accounting adjustments to reflect changes in the fair value of hedged risks. Hedge accounting of subordinated liabilitiesceased during 2010, and the hedge accounting adjustments which existed at the point of cessation of hedge accounting are being amortised to theIncome Statement over the original expected life of the hedge arrangement on an EIR basis, with the unamortised adjustments being carried withinthe carrying amount of the associated subordinated liabilities. On derecognition of a subordinated liability, any remaining unamortised hedgeaccounting adjustment is released to the Income Statement as part of the gain or loss on derecognition.

Since mid-June 2009, the B&B Board have deferred payment of all principal and coupons in respect of B&B's subordinated liabilities. Eachdecision was taken on a case-by-case basis until 23 February 2010. Following the Board meeting of 23 February 2010, the B&B Group announcedthat it had resolved not to make any payment of principal or interest in respect of the B&B Group's subordinated liabilities as listed in the tableabove during the period prior to the date on which it repays in full the Statutory Debt described in note 21. This Board decision followed thenotification to the B&B Group on 25 January 2010 of the EC's approval of State Aid. The EC's decision set various conditions on the B&B Groupreceiving State Aid, one of which was that the B&B Group should not make payments of principal or interest on its subordinated liabilities during theperiod prior to the date on which it repays in full the Statutory Debt.

As a consequence of the announcement of 23 February 2010, the carrying value of B&B's subordinated liabilities was reduced by £104.3m, with anequal gain being recognised in the Income Statement, to reflect the revised present value of the new expected cash flows of these instruments.Following this reduction, for accounting purposes, interest, including unwind of the reduction in carrying value, accrues on the reduced liabilities onan EIR basis at the original EIR of the liability, such that the carrying value will ultimately accrete up to principal plus interest due. For subordinatedliabilities where interest is compound, the interest accrual also takes into account interest on the deferred coupons, on an EIR basis.

As detailed in note 7, in 2012 and 2011 the Group bought back certain of its own subordinated liabilities.

Redemptions of any subordinated liabilities prior to their final maturity date are subject to obtaining prior consent of the FSA.

The rights of repayment of holders of subordinated liabilities are subordinated to the claims of other creditors.


55

27. Called up share capital

Group and Company Ordinary shares of 25p each:

2012Number ofshares (m)

2011Number ofshares (m)

2012

£m

2011

£m

Ordinary shares issued and fully paid at 1 January and31 December

1,445.3 1,445.3 361.3 361.3

In accordance with the Companies Act 2006, the Company no longer has authorised capital other than its issued capital.

The Company has one class of shares: Ordinary shares of 25p each, ranking equally in respect of rights attaching to voting, dividends and in theevent of a winding-up.

No dividends were declared or paid in 2012 or 2011 on the Company's shares.

28. Reserves

Reserves comprise the following: Group Group Company Company2012 2011 2012 2011

£m £m £m £m

Share premium reserve 198.9 198.9 198.9 198.9Capital redemption reserve 29.2 29.2 29.2 29.2Available-for-sale reserve 17.1 19.7 17.1 19.6Cash flow hedge reserve 93.1 82.5 86.8 46.6Total 338.3 330.3 332.0 294.3

The share premium reserve represents the excess of the consideration received for issued shares over the nominal value of those shares, net oftransaction costs.

The capital redemption reserve was created on the sale of surplus conversion shares and to maintain the total amount of capital when shares wererepurchased by the Company.

Available-for-sale reserve Group Group Company Company2012 2011 2012 2011

£m £m £m £mAt 1 January 19.7 14.0 19.6 14.0Amounts recognised in equity (0.6) 6.1 (0.6) 6.0Amounts transferred to net income (2.0) (0.4) (1.9) (0.4)At 31 December 17.1 19.7 17.1 19.6

The available-for-sale reserve represents cumulative fair value movements on assets classified as available-for-sale.

Cash flow hedge reserve Group Group Company Company2012 2011 2012 2011

£m £m £m £mAt 1 January 82.5 (26.5) 46.6 (26.5)Amounts recognised in equity (168.5) 132.4 (143.3) 94.5Amounts transferred to net income 179.1 (23.4) 183.5 (21.4)At 31 December 93.1 82.5 86.8 46.6

The cash flow hedge reserve represents cumulative fair value movements on financial instruments which are effective cash flow hedges.


56

29. Off-Balance Sheet commitments: commitments payable

Group

At 31 December 2012Within one

yearIn one to

five yearsOver five

years Total£m £m £m £m

Loan commitments:- Lifetime mortgages 56.6 239.7 991.4 1,287.7- Other loans 139.6 - - 139.6

Total loan commitments 196.2 239.7 991.4 1,427.3Operating lease commitments:- Land and buildings 0.2 0.6 - 0.8

Capital commitments 2.8 - - 2.8Total 199.2 240.3 991.4 1,430.9

Group


yearIn one to

five yearsOver five


Loan commitments:- Lifetime mortgages 56.7 241.7 1,086.1 1,384.5- Other loans 110.9 - - 110.9

Total loan commitments 167.6 241.7 1,086.1 1,495.4Operating lease commitments:- Land and buildings 0.7 0.2 - 0.9

Capital commitments 7.9 - - 7.9Total 176.2 241.9 1,086.1 1,504.2

Company


yearIn one to

five yearsOver five


Loan commitments:- Lifetime mortgages 1.2 5.0 20.4 26.6- Other loans 114.2 - - 114.2

Total loan commitments 115.4 5.0 20.4 140.8Operating lease commitments:- Land and buildings 0.2 0.6 - 0.8

Capital commitments 2.8 - - 2.8Total 118.4 5.6 20.4 144.4

Company


yearIn one to

five yearsOver five


Loan commitments:- Lifetime mortgages 1.1 5.0 22.3 28.4- Other loans 90.6 - - 90.6

Total loan commitments 91.7 5.0 22.3 119.0Operating lease commitments:- Land and buildings 0.7 0.2 - 0.9

Capital commitments 7.9 - - 7.9Total 100.3 5.2 22.3 127.8

Loan commitments represent contractual amounts to which the Group/Company is committed for extension of credit to customers. In respect oflifetime mortgages which involved the advance of a lump sum on which interest continues to accrue but is not payable until the loan is redeemed,the commitment reflects an estimate of the interest expected to roll up until redemption. On other mortgages, the commitment comprises cashwhich could be drawn down by customers in respect of further advances and re-drawal of amounts voluntarily overpaid.

Operating lease commitments represent minimum future lease payments under non-cancellable operating leases.

Capital commitments represent contractual amounts to which the Group/Company is committed in respect of IT infrastructure investment.


57

30. Related party disclosures

(a) Key management personnelThe Group considers the Board of Directors and the members of the Executive Committee to be the key management personnel. All remainingloans to key personnel, which had all been advanced in the normal course of business, were redeemed during 2011. The volumes of relatedparty transactions, outstanding balances at the year end and related income and expense for the year are set out below.

2012 2011Loans: £000 £000

Loans outstanding at 1 January - 17Net movement over the year - (17)Loans outstanding at 31 December - -Interest charged to key management personnel - 1

Interest was charged at a market rate on all loans to key management personnel.

A summary of the Group's share of the remuneration of the 16 (2011: 15) key management personnel is set out in the table below. Theseamounts include the Group's share of the remuneration of the Directors which is set out in more detail in the Directors' Remuneration Report onpages xx to xx of the 2012 Annual Report and Accounts of UKAR. The Directors' Remuneration Report gives details of the UKAR Group'sDirectors' salaries, fees, bonuses, pension benefits, other incentives and other benefits. The aggregate UKAR Group emoluments of the UKARGroup's Directors were £1,680,357 (2011: £1,444,757) and the emoluments of the highest paid Director were £642,820 (2011: £596,697). In2012 the B&B Group bore half of the cost of the UKAR Directors in its Income Statement, the other half being borne by NRAM. Included in theB&B Group's Income Statement, the aggregate Directors' emoluments and the emoluments of the highest paid Director amounted to £840,179and £321,410 respectively (2011: £722,379 and £298,349 respectively). The key management personnel contributed £59,000 (2011: £40,000)to Group pension schemes during the year.

2012 2011Remuneration of key management personnel: £000 £000

Short-term employee benefits 1,619 1,498Post-employment benefits 147 134Termination benefits 103 -Total 1,869 1,632

Further details of the accounting treatment of pensions and of the Group's and Company's transactions and balances with the Group's pensionschemes are given in note 24. There were no amounts due to or from the schemes at 31 December 2012 (2011: £nil).

(b) Her Majesty's GovernmentAs described in note 36, the Company considers Her Majesty's Government to be its ultimate controlling party. The Group's material balanceswith departments and bodies of Her Majesty's Government comprise deposits with the Bank of England (see note 10), loans from HM Treasury(see note 21), the Statutory Debt (see note 21) and UK Government securities held. HM Treasury has also provided guarantee arrangements tothe Group, for which the Group pays fees (see note 3). In addition to these loans and guarantees, the Group has balances and transactions withnumerous Government bodies on an arm's length basis in relation to the payment of corporation tax, VAT and employee taxes, and the paymentof regulatory fees and levies.

(c) Subsidiary companiesBalances outstanding with subsidiary companies and movements in these loans were as follows:

Securitisation Other 2012 Securitisation Other 2011SPVs subsidiaries Total SPVs subsidiaries Total

Receivables £m £m £m £m £m £mAt 1 January 205.8 8,040.4 8,246.2 0.1 8,887.4 8,887.5Net movement over the year 107.9 (763.3) (655.4) 205.7 (847.0) (641.3)At 31 December 313.7 7,277.1 7,590.8 205.8 8,040.4 8,246.2

Securitisation Other 2012 Securitisation Other 2011SPVs subsidiaries Total SPVs subsidiaries Total

Payables £m £m £m £m £m £mAt 1 January 4,109.4 1,105.1 5,214.5 4,240.4 1,324.7 5,565.1Net movement over the year (399.1) (171.6) (570.7) (131.0) (219.6) (350.6)At 31 December 3,710.3 933.5 4,643.8 4,109.4 1,105.1 5,214.5

The Company held £3,903.2m of loan notes issued by SPV subsidiaries at 31 December 2012 (31 December 2011: £3,901.8). In order to avoidrecognising the underlying mortgage assets twice, the securities are netted off the Company's liabilities to the subsidiaries which issued thesecurities. As detailed in note 7, during the year the Company purchased notes with a face value of £83.9m (2011: £nil).


58

30. Related party disclosures (continued)

(d) Fellow subsidiaryThe Company held £86.5m of loan notes issued by NRAM at 31 December 2012 (2011: £84.2m). Interest income earned by the Company onthese notes during the year amounted to £1.2m (2011: £1.5m). NRAM held £48.9m of loan notes issued by the Company at 31 December 2012(2011: £50.3m). The Company's interest expense on these notes during the year amounted to £0.6m (2011: £0.6m).

During the year, the Company recharged a total of £133.8m (2011: £101.7m) to NRAM of which £106.1m (2011: £75.6m) was deducted from theCompany's ongoing administrative expenses (including £30.5m (2011: £24.9m) in respect of pass through charges from Northern Rock plc) and£27.7m (2011: £26.1m) was deducted from the Company's other net administrative expenses. In addition, NRAM recharged the Company £1.0m(2011: £2.7m) which is included in fee and commission income.

At 31 December 2012 the Company was owed £49.2m by NRAM (2011: £28.7m).

(e) Parent companyDuring 2012 the Company was charged £0.4m (2011: £0.4m) by UKAR for the services of Non-Executive Directors. The Company rechargedUKAR £0.7m (2011: £0.7m) in respect of fees and other costs of Non-Executive Directors which were paid by B&B on UKAR's behalf.

31. Capital structure

The Company met its capital requirements in full throughout 2012 and 2011, and has received no additional capital from HM Treasury sincenationalisation. B&B is regulated by the FSA as a mortgage administration company under the MIPRU regime. MIPRU regulation is applied atindividual company level, not at B&B Group level. The Board considers core equity, formerly tier 1 capital, to be of pre-eminent importance in thecapital structure of the business and continues to monitor this closely, in addition to the total level of capital. The Directors believe the Companyhas appropriate and adequate levels of capital to support its activities, subject to the continuing support of HM Treasury. Strictly, the Company isrequired to hold capital in excess of 1% of total Balance Sheet assets plus any undrawn commitments. However, the Board believes it shouldhold capital above 1% and at the year end capital in the Company represented 4.6% of the Company's assets.

The table below sets out the Company's regulatory capital resources under MIPRU.

The primary objectives of the Company's capital management are to maintain capital resources to support the objectives of the business, tocover risks inherent in its activities and to ensure compliance with externally imposed capital requirements. The capital structure is managed inresponse to changes in the nature of the Company's activities and economic conditions.

The Company defines equity and certain other capital instruments as capital. Capital excludes accounting reserves for available-for-sale assetsand cash flow hedges. The Company's capital adequacy and capital resources are managed and monitored in accordance with the regulatorycapital rules of the FSA. The Company must at all times monitor and demonstrate compliance with the relevant regulatory capital requirementsof the FSA. The required capital information is filed with the FSA on a quarterly basis.

Company2012

Company2011

At 31 December £m £m

Share capital and reserves 2,382.6 2,331.1Available-for-sale reserve adjustments (17.1) (19.6)Cash flow hedge reserve adjustments (86.8) (46.6)Net pension deficit adjustment (103.3) (77.6)Less: deductions (521.3) (508.3)Tier 1 capital 1,654.1 1,679.0Capital instruments 83.6 81.5Total capital 1,737.7 1,760.5


59

32. Financial instruments

(a) Categories of financial assets and financial liabilities: carrying value compared to fair valueThe following table summarises the carrying amounts and fair values of financial assets and liabilities. Assets are presented at bid prices,whereas offer prices are used for liabilities. The accounting policy note 1 (g) sets out the key principles used for estimating the fair values offinancial instruments. This note provides some additional information in respect of the methodologies used.

At 31 December 2012Available-

for-saleAssets at fair value

through profit or lossLoans and

receivablesHedging

adjustments

Totalcarrying

value Fair valueGroup £m £m £m £m £m £mFinancial assets:Balances with the Bank of England - - 841.3 - 841.3 841.3Cash at bank and in hand - - 2,252.0 - 2,252.0 2,252.0Investment securities 611.6 - - 12.3 623.9 623.9Loans to customers - - 32,467.8 - 32,467.8 32,479.1Fair value adjustments on portfolio hedging - - - 341.4 341.4 -Derivative financial instruments - 1,800.3 - - 1,800.3 1,800.3Other financial assets - - 56.7 - 56.7 56.7Total financial assets 611.6 1,800.3 35,617.8 353.7 38,383.4 38,053.3




receivablesHedging

adjustments

Totalcarrying

value Fair valueGroup £m £m £m £m £m £mFinancial assets:Balances with the Bank of England - - 884.6 - 884.6 884.6Cash at bank and in hand - - 1,386.7 - 1,386.7 1,386.7Investment securities 926.1 - - 17.0 943.1 943.1Loans to customers - - 34,079.8 - 34,079.8 34,100.8Fair value adjustments on portfolio hedging - - - 362.6 362.6 -Derivative financial instruments - 2,318.0 - - 2,318.0 2,318.0Other financial assets - - 30.5 - 30.5 30.5Total financial assets 926.1 2,318.0 36,381.6 379.6 40,005.3 39,663.7

Liabilities at fair valuethrough profit or loss

Liabilities atamortised cost

Hedgingadjustments

Totalcarrying

value Fair value£m £m £m £m £m

Financial liabilities:Amounts due to banks - 393.7 - 393.7 393.7Statutory Debt and HM Treasury loans - 26,855.8 - 26,855.8 26,855.8Derivative financial instruments 577.9 - - 577.9 577.9Debt securities in issue - 9,057.8 447.7 9,505.5 8,336.4Capital instruments - 129.1 2.0 131.1 14.8Other financial liabilities - 85.5 - 85.5 85.5Total financial liabilities 577.9 36,521.9 449.7 37,549.5 36,264.1



Hedgingadjustments

Totalcarrying


Financial liabilities:Amounts due to banks - 1,221.2 - 1,221.2 1,221.2Statutory Debt and HM Treasury loans - 25,424.2 - 25,424.2 25,424.2Derivative financial instruments 502.2 - - 502.2 502.2Debt securities in issue - 8,009.2 328.7 8,337.9 8,047.1Capital instruments - 144.8 1.4 146.2 73.9Other financial liabilities - 90.6 - 90.6 90.6Total financial liabilities 502.2 34,890.0 330.1 35,722.3 35,359.2


60

32. Financial instruments (continued)

(a) Categories of financial assets and financial liabilities: carrying value compared to fair value (continued)




receivablesHedging

adjustments

Totalcarrying

value Fair valueCompany £m £m £m £m £m £mFinancial assets:Balances with the Bank of England - - 841.3 - 841.3 841.3Cash at bank and in hand - - 1,192.2 - 1,192.2 1,192.2Investment securities 611.6 - 300.5 12.3 924.4 924.4Loans to customers - - 32,310.6 - 32,310.6 32,315.4Fair value adjustments on portfolio hedging - - - 341.4 341.4 -Derivative financial instruments - 1,299.8 - - 1,299.8 1,299.8Other financial assets - - 54.5 - 54.5 54.5Total financial assets 611.6 1,299.8 34,699.1 353.7 36,964.2 36,627.6



Hedgingadjustments

Totalcarrying


Financial liabilities:Amounts due to banks - 605.6 - 605.6 605.6Other deposits - 4,643.8 - 4,643.8 4,643.8Statutory Debt and HM Treasury loans - 25,424.2 - 25,424.2 25,424.2Derivative financial instruments 502.2 - - 502.2 502.2Debt securities in issue - 3,734.3 327.3 4,061.6 4,028.8Capital instruments - 144.8 1.4 146.2 73.9Other financial liabilities - 86.0 - 86.0 86.0Total financial liabilities 502.2 34,638.7 328.7 35,469.6 35,364.5




receivablesHedging

adjustments

Totalcarrying

value Fair valueCompany £m £m £m £m £m £mFinancial assets:Balances with the Bank of England - - 884.4 - 884.4 884.4Cash at bank and in hand - - 572.6 - 572.6 572.6Investment securities 926.1 - 300.5 17.0 1,243.6 1,243.6Loans to customers - - 34,203.9 - 34,203.9 34,209.9Fair value adjustments on portfolio hedging - - - 362.6 362.6 -Derivative financial instruments - 1,659.1 - - 1,659.1 1,659.1Other financial assets - - 30.0 - 30.0 30.0Total financial assets 926.1 1,659.1 35,991.4 379.6 38,956.2 38,599.6



Hedgingadjustments

Totalcarrying


Financial liabilities:Amounts due to banks - 35.2 - 35.2 35.2Other deposits - 5,214.5 - 5,214.5 5,214.5Statutory Debt and HM Treasury loans - 26,855.8 - 26,855.8 26,855.8Derivative financial instruments 577.9 - - 577.9 577.9Debt securities in issue - 4,239.0 442.9 4,681.9 4,547.9Capital instruments - 129.1 2.0 131.1 14.8Other financial liabilities - 81.0 - 81.0 81.0Total financial liabilities 577.9 36,554.6 444.9 37,577.4 37,327.1

No financial assets or liabilities were reclassified during 2012 or 2011 between amortised cost and fair value categories.

Valuation methods for calculations of fair values in the table above for those financial assets and liabilities not presented on the Balance Sheet attheir fair value are set out below:


61

32 Financial instruments (continued)

(a) Categories of financial assets and financial liabilities: carrying value compared to fair value (continued)

Balances with the Bank of EnglandFair value approximates to carrying value because they have minimal credit losses and are either short term in nature or reprice frequently.

Cash at bank and in handFair value was estimated by using discounted cash flows applying either market rates where practicable or rates offered by other financialinstitutions for accounts with similar characteristics. The fair value of floating rate placements, fixed rate placements with less than six months tomaturity and overnight deposits is their carrying amount.

Investment securities held as loans and receivablesFair values are based on quoted prices where available or by using discounted cash flows applying market rates.

Loans to customersThe Group provides loans of varying rates and maturities to customers. The fair value of loans with variable interest rates is considered toapproximate to carrying value as the rate charged on these loans varies in line with changes in market rates. For loans with fixed interest rates,fair value was estimated by discounting cash flows using market rates or rates normally offered by the Group. The change in interest rates sincethe majority of these loans were originated means that their fair value can vary significantly from their carrying value. However, as the Group’spolicy is to hedge fixed rate loans in respect of interest rate risk, this does not indicate that the Group has an exposure to this difference in value

Amounts due to banks and other depositsFair values of deposit liabilities repayable on demand or with variable interest rates are considered to approximate to carrying value. The fairvalue of fixed interest deposits with less than six months to maturity is their carrying amount. The fair value of all other deposit liabilities wasestimated using discounted cash flows, applying market rates.

Statutory Debt and HM Treasury loansThe fair value is assumed to be the carrying amount as the interest rate charged varies in line with changes in market rates, or the loans areconsidered to be repayable on demand subject to timing of repayment of loans to customers.

Debt securities in issue and capital instrumentsFair values are based on quoted prices where available, or by using discounted cash flows, applying market rates.

(b) Interest income and expense on financial instruments that are not at fair value through profit or loss

Group 2012 2011£m £m

Interest income 1,004.8 1,107.6Interest expense (712.0) (668.2)Net interest income 292.8 439.4

These amounts represent interest income and expense before hedging arrangements.

(c) Impaired financial assetsAllowance accounts for credit losses in respect of impairment of loans to customers are detailed in note 11 and in respect of investmentsecurities in note 9. No impairment loss has been recognised in respect of any other class of financial asset, and no other class of financialasset includes assets that are past due.

(d) Derecognition of financial assetsLoans to customers which have been securitised are not derecognised from the Balance Sheet as the originator of the loans retains substantiallyall of the risks and rewards of the securitised loans (see note 22).


62


(e) Hedge accounting

Strategy in using derivative financial instrumentsThe Board has authorised the use of derivative instruments for the purpose of supporting the strategic and operational business activities of theGroup and reducing the risk of loss arising in the Group or Company from changes in interest rates and exchange rates. All use of derivativeinstruments within the Group is to hedge risk exposure, and the Group takes no trading positions in derivatives.

The objective when using any derivative instrument is to ensure that the risk to reward profile of any transaction is optimised. The intention isonly to use derivatives to create economically effective hedges. However, IAS 39 requires certain tests to be satisfied before hedge accounting ispermitted. Consequently not all economic hedges are designated as accounting hedges, either because natural accounting offsets are expectedor because obtaining hedge accounting would be especially onerous.

(i) Fair value hedgesThe Group designates a number of derivatives as fair value hedges. In particular the Group has three approaches establishing relationships for:

● Hedging the interest rate and foreign currency exchange rate risk of non-prepayable, foreign currency denominated fixed rate assets orliabilities on a one-for-one basis with fixed/floating or floating/fixed cross currency interest rate swaps.

● Hedging the interest rate risk of a single currency portfolio of sterling, US Dollar or Euro non-prepayable fixed rate assets/liabilities on a one-for-one basis with vanilla fixed/floating or floating/fixed interest rate swaps.

● Hedging the interest rate risk of a portfolio of prepayable fixed rate assets with interest rate derivatives. This solution is used to establish amacro fair value hedge for derivatives hedging fixed rate mortgages. The Group believes this solution is consistent with its policy for hedgingfixed rate mortgages on an economic basis.

(ii) Cash flow hedgesThe Group designates a number of derivatives as cash flow hedges. In particular, the Group adopts the following approaches:

● Using fixed interest rate swaps to hedge floating rate sterling liabilities.

● To address the volatility generated by floating/floating cross currency swaps, they are placed into cash flow hedges; the accounting hedgerelationship is to hedge the foreign currency exchange rate risk of the foreign currency denominated asset/liability.

● Fixed/floating cross currency swaps are split into their separate risk components and separately designated into cash flow hedges.

● Basis swaps are split into their separate risk components and separately designated into cash flow hedges.


63


(e) Hedge accounting (continued)

(iii) Net investment hedgesThe Group has not designated any derivatives as net investment hedges in 2012 or 2011.

The Group had the following types of hedges:

At 31 December 2012 Fair valuehedges

Cash flowhedges

Economichedges Total

Nominalamounts

£m £m £m £m £m

Exchange rate contracts - 1,768.2 15.4 1,783.6 6,104.5Interest rate contracts 8.2 1.6 6.9 16.7 4,000.1Total asset balances 8.2 1,769.8 22.3 1,800.3 10,104.6

Exchange rate contracts - - 3.1 3.1 93.2Interest rate contracts 398.8 86.8 13.5 499.1 9,670.6Total liability balances 398.8 86.8 16.6 502.2 9,763.8

Fair value of hedging instruments (390.6) 1,683.0 5.7 1,298.1 340.8

At 31 December 2011 Fair valuehedges

Cash flowhedges

Economichedges Total

Nominalamounts

£m £m £m £m £m



Fair value of hedging instruments (403.7) 2,001.1 142.7 1,740.1 17,001.8

The Company had the following types of hedges:

At 31 December 2012Fair value

hedgesCash flow

hedgesEconomic

hedges TotalNominalamounts

£m £m £m £m £m



Fair value of hedging instruments (390.6) 1,182.4 5.8 797.6 (2,611.3)

At 31 December 2011Fair value

hedgesCash flow

hedgesEconomic

hedges TotalNominalamounts

£m £m £m £m £m



Fair value of hedging instruments (403.7) 1,472.5 12.4 1,081.2 13,832.3


64


(f) Fair value measurement

Financial assets and liabilities carried at fair value are valued on the following bases:

Group Level 1 Level 2 Level 3 TotalAt 31 December 2012 £m £m £m £mFinancial assets:Investment securities - available-for-sale 224.7 399.2 - 623.9Derivative financial instruments - 1,292.9 507.4 1,800.3

Financial liabilities:Derivative financial instruments - (490.5) (11.7) (502.2)Net financial assets 224.7 1,201.6 495.7 1,922.0

Group Level 1 Level 2 Level 3 TotalAt 31 December 2011 £m £m £m £mFinancial assets:Investment securities - available-for-sale 399.7 543.4 - 943.1Derivative financial instruments - 1,582.8 735.2 2,318.0

Financial liabilities:Derivative financial instruments - (495.6) (82.3) (577.9)Net financial assets 399.7 1,630.6 652.9 2,683.2

CompanyAt 31 December 2012 Level 1 Level 2 Level 3 Total

£m £m £m £mFinancial assets:Investment securities - available-for-sale 224.7 399.2 - 623.9Derivative financial instruments - 1,292.9 6.9 1,299.8

Financial liabilities:Derivative financial instruments - (490.5) (11.7) (502.2)Net financial assets 224.7 1,201.6 (4.8) 1,421.5

CompanyAt 31 December 2011 Level 1 Level 2 Level 3 Total

£m £m £m £mFinancial assets:Investment securities - available-for-sale 399.7 543.4 - 943.1Derivative financial instruments - 1,582.9 76.2 1,659.1

Financial liabilities:Derivative financial instruments - (495.6) (82.3) (577.9)Net financial assets 399.7 1,630.7 (6.1) 2,024.3

Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, whether directly (ie as price) or indirectly (i.e. derivedfrom the implications of prices).

Level 3: Inputs for the asset or liability that are not based on observable market data, or have significant unobservable inputs.


65


(f) Fair value measurement (continued)

The movement in assets and liabilities measured using a valuation technique for which any significant input is not based on observable market data(Level 3) is as follows:

Group Financialassets

Financialliabilities Total

£m £m £mAt 1 January 2012 735.2 (82.3) 652.9Total (losses)/gains in the Income Statement (69.5) 70.6 1.1Total losses in the cash flow hedge reserve (158.3) - (158.3)At 31 December 2012 507.4 (11.7) 495.7

Total gains in the Group's Income Statement of £1.1m (2011: £2.7m) are a result of fair value gains.

Company Financialassets


£m £m £mAt 1 January 2012 76.2 (82.3) (6.1)Total (losses)/gains in the Income Statement (69.3) 70.6 1.3At 31 December 2012 6.9 (11.7) (4.8)

Company Financialassets


£m £m £mAt 1 January 2011 69.1 (69.6) (0.5)Total gains/(losses) in the Income Statement 7.1 (12.7) (5.6)At 31 December 2011 76.2 (82.3) (6.1)

All level 3 financial assets and liabilities are derivative financial instruments.

Group Financialassets


£m £m £mAt 1 January 2011 971.2 (68.5) 902.7Total gains/(losses) in the Income Statement 16.5 (13.8) 2.7Total losses in the cash flow hedge reserve (252.5) - (252.5)At 31 December 2011 735.2 (82.3) 652.9


66


(f) Fair value measurement (continued)

Total gains in the Company Income Statement of £1.3m (2011: losses £5.6m) are a result of fair value gains and losses.

These amounts are included within 'unrealised fair value movements on financial instruments', and all relate to assets and liabilities which werestill held at the Balance Sheet date.

The main unobservable input that affects the valuation of the Group's derivative financial instruments is the forecast level of customerprepayments in respect of mortgage loans assigned to securitisation structures. An increase in forecast prepayments will cause interest rate andcross currency swaps associated with the notes in issue to pay down in an accelerated manner, so affecting their fair values. The following tableshows the impact on reported fair values of a hypothetical 10% increase in customer prepayments.

Group2012

Reportedfair value

Revisedfair value

Favourablechanges to

IncomeStatement

Unfavourablechanges to

IncomeStatement

£m £m £m £mFinancial assetsDerivative financial instruments 507.4 499.6 - -

Financial liabilitiesDerivative financial instruments (11.7) (11.7) - -

Group

2011

Reportedfair value

Revisedfair value

Favourablechanges to

IncomeStatement

Unfavourablechanges to

Income Statement

£m £m £m £mFinancial assetsDerivative financial instruments 735.2 734.6 - -

Financial liabilitiesDerivative financial instruments (82.3) (82.3) - -

Company

2012 2011Reportedfair value

Revisedfair value

Reportedfair value

Revisedfair value

£m £m £m £mFinancial assetsDerivative financial instruments 6.9 6.9 76.2 76.2

Financial liabilitiesDerivative financial instruments (11.7) (11.7) (82.3) (82.3)

(g) Transferred financial assets

As set out in note 22, the Group has transferred financial assets (loans and receivables) to securitisation structures. The Group retains all of therisks and rewards associated with these loans and they are therefore retained on the Group's Balance Sheet.

The table below sets out the carrying values of the transferred assets and the associated liabilities. For securitisation structures, the associatedliabilities represent the external notes in issue (see note 22). None of these notes have recourse to the transferred assets.

At 31 December 2012 Transferred assets Associated liabilitiesCarrying amount Carrying amount

£m £m

Loans to customers securitised 19,068.3 7,878.6


67

33. Collateral pledged and received

Group Company2012 2011 2012 2011

£m £m £m £m

Cash collateral which the Group/Company has provided inrespect of derivative contracts

431.2 432.8 431.2 432.8

Total collateral pledged 431.2 432.8 431.2 432.8

Group Company2012 2011 2012 2011

£m £m £m £m

Cash collateral which the Group/Company has received inrespect of derivative contracts

1,221.0 391.6 605.4 33.1

Total collateral received 1,221.0 391.6 605.4 33.1

In addition to the collateral amounts shown above, certain loans to customers provide security in respect of securitised note and CoveredBond funding as detailed in note 22. These loans, and also cash collateral pledged shown above, are carried on the Balance Sheet. Theliability to repay the cash collateral received is included within loans and other amounts due to banks in the Balance Sheet.

34. Financial risk management

A description of the principal risks to which the Group is exposed is provided on pages 10 to 12 which form an integral part of the auditedFinancial Statements.

(a) Financial and market riskThe following table describes the significant activities undertaken by the Group which give rise to financial or market risk, the potentialconsequences associated with such activities and the derivative instruments used by the Group to mitigate the risks arising.

Activity Risk Type of derivative instrument usedFunding activities in sterling involving either fixedrate instruments or instruments with embeddedoptions

Sensitivity to changes in interest rates Interest rate swaps

Fixed and capped rate mortgage lending andinvestment activities involving either fixed rateinstruments or instruments with embedded options

Sensitivity to changes in interest rates Interest rate swaps and options

Variable rate mortgage products Sensitivity to changes in interest rates Interest rate swapsInvestment and funding in foreign currencies Sensitivity to changes in foreign currency

exchange ratesCross-currency interest rate swaps andforeign exchange contracts

The accounting policy for derivatives and hedge accounting is described in note 1(i), and further details of hedge accounting are provided in note32(e).

(b) Credit risk

The Board has approved a framework for maximum credit counterparty limits against which total exposures are continually monitored andcontrolled. The credit limit structure adopts a risk based matrix whereby lower rated counterparties are afforded lower overall levels of limit.Although publicly available ratings produced by rating agencies provide a useful guide to the creditworthiness of counterparties, an internalevaluation is also used in the limit assignment process. Counterparties are assigned maximum limits in accordance with the ratings matrix,based on the lowest rating afforded to any part of the counterparty group.

Maximum credit risk exposure at 31 December before taking account of any collateral and other credit enhancements:Group Company

2012 2011 2012 2011£m £m £m £m

On Balance Sheet:Balances with the Bank of England 841.3 884.6 841.3 884.4Cash at bank and in hand 2,252.0 1,386.7 1,192.2 572.6Investment securities 623.9 943.1 924.4 1,243.6Loans to customers 32,467.8 34,079.8 32,310.6 34,203.9Derivative financial instruments 1,800.3 2,318.0 1,299.8 1,659.1Other financial assets 56.7 30.5 54.5 30.0Total on Balance Sheet 38,042.0 39,642.7 36,622.8 38,593.6Off Balance Sheet:Loan commitments (see note 29) 1,427.3 1,495.4 140.8 119.0

Loans to customers are secured on property.

Additional information in respect of credit risk is provided in note 10 (for wholesale assets) and note 11 (for loans to customers).


68

34. Financial risk management (continued)

(c) Liquidity risk

The Group and Company closely monitor their liquidity position against the Board’s liquidity policy. Minimum and target liquidity levels areestablished through stress testing and cash flow forecasting, taking into consideration an assessment of any emerging and potentially extremefunding conditions.

The table below analyses the Group's and Company's financial assets and liabilities into relevant maturity groupings:

Group Ondemand

Withinthree

months

Afterthree

monthsbut within

six months

Aftersix monthsbut within

one year

Afterone year

but withinfive years

Afterfive

years TotalAt 31 December 2012 £m £m £m £m £m £m £mFinancial assets:Balances with the Bank of England 841.3 - - - - - 841.3Cash at bank and in hand 2,229.0 23.0 - - - - 2,252.0Investment securities - 51.8 2.0 0.3 286.9 282.9 623.9Loans to customers 91.9 64.0 64.1 245.3 2,149.6 29,852.9 32,467.8Fair value adjustments on portfolio hedging - 10.2 18.5 19.9 71.7 221.1 341.4Derivative financial instruments - 34.9 84.1 85.0 1,216.0 380.3 1,800.3Other financial assets - 56.7 - - - - 56.7Total financial assets 3,162.2 240.6 168.7 350.5 3,724.2 30,737.2 38,383.4Financial liabilities:Amounts due to banks 1,221.2 - - - - - 1,221.2Statutory Debt and HM Treasury loans 25,424.2 - - - - - 25,424.2Derivative financial instruments - 10.7 4.1 3.4 112.4 371.6 502.2Debt securities in issue - 311.3 194.1 393.5 5,968.9 1,470.1 8,337.9Capital instruments - - - - - 146.2 146.2Other financial liabilities - 90.6 - - - - 90.6Total financial liabilities 26,645.4 412.6 198.2 396.9 6,081.3 1,987.9 35,722.3Net liquidity gap (23,483.2) (172.0) (29.5) (46.4) (2,357.1) 28,749.3 2,661.1

Group

Ondemand

Withinthree

months

Afterthree

monthsbut within

six months

Aftersix months

but withinone year

Afterone year


Afterfive

years TotalAt 31 December 2011 £m £m £m £m £m £m £mFinancial assets:Balances with the Bank of England 884.6 - - - - - 884.6Cash at bank and in hand 1,367.1 19.6 - - - - 1,386.7Investment securities - 2.0 2.0 170.0 312.1 457.0 943.1Loans to customers 107.2 46.5 44.2 150.0 1,774.6 31,957.3 34,079.8Fair value adjustments on portfoliohedging

- 29.6 31.2 57.7 53.8 190.3 362.6

Derivative financial instruments - 96.6 82.2 26.6 1,126.2 986.4 2,318.0Other financial assets - 29.8 - - 0.7 - 30.5Total financial assets 2,358.9 224.1 159.6 404.3 3,267.4 33,591.0 40,005.3Financial liabilities:Amounts due to banks 393.7 - - - - - 393.7Statutory Debt and HM Treasury loans 26,855.8 - - - - - 26,855.8Derivative financial instruments - 13.0 2.0 11.3 73.6 478.0 577.9Debt securities in issue - 125.5 504.1 203.7 5,113.7 3,558.5 9,505.5Capital instruments - - - - - 131.1 131.1Other financial liabilities - 85.5 - - - - 85.5Total financial liabilities 27,249.5 224.0 506.1 215.0 5,187.3 4,167.6 37,549.5Net liquidity gap (24,890.6) 0.1 (346.5) 189.3 (1,919.9) 29,423.4 2,455.8


69


(c) Liquidity risk (continued)

Company

Ondemand

Withinthree

months

Afterthree

monthsbut within

six months


one year

Afterone year


Afterfive

years TotalAt 31 December 2012 £m £m £m £m £m £m £mFinancial assets:Balances with the Bank of England 841.3 - - - - - 841.3Cash at bank and in hand 1,169.2 23.0 - - - - 1,192.2Investment securities - 51.8 2.0 0.3 587.4 282.9 924.4Loans to customers 7,666.8 45.4 46.8 211.4 1,760.2 22,580.0 32,310.6Fair value adjustments on portfoliohedging

- 10.2 18.5 19.9 71.7 221.1 341.4

Derivative financial instruments - 24.2 70.3 57.7 906.5 241.1 1,299.8Other financial assets - 54.5 - - - - 54.5Total financial assets 9,677.3 209.1 137.6 289.3 3,325.8 23,325.1 36,964.2Financial liabilities:Amounts due to banks 605.6 - - - - - 605.6Other deposits 4,643.8 - - - - - 4,643.8Statutory Debt and HM Treasury loans 25,424.2 - - - - - 25,424.2Derivative financial instruments - 10.7 4.1 3.4 112.4 371.6 502.2Debt securities in issue - 194.7 69.8 147.1 3,179.5 470.5 4,061.6Capital instruments - - - - - 146.2 146.2Other financial liabilities - 86.0 - - - - 86.0Total financial liabilities 30,673.6 291.4 73.9 150.5 3,291.9 988.3 35,469.6Net liquidity gap (20,996.3) (82.3) 63.7 138.8 33.9 22,336.8 1,494.6

Company

Ondemand

Withinthree

months

Afterthree

monthsbut within

six months

Aftersix months

but withinone year

Afterone year


Afterfive

years TotalAt 31 December 2011 £m £m £m £m £m £m £mFinancial assets:Balances with the Bank of England 884.4 - - - - - 884.4Cash at bank and in hand 553.1 19.5 - - - - 572.6Investment securities - 2.0 2.0 170.0 612.6 457.0 1,243.6Loans to customers 8,331.5 43.0 41.0 132.4 1,552.2 24,103.8 34,203.9Fair value adjustments on portfoliohedging

- 29.6 31.2 57.7 53.8 190.3 362.6

Derivative financial instruments - 88.0 72.2 1.2 748.1 749.6 1,659.1Other financial assets - 29.3 - - 0.7 - 30.0Total financial assets 9,769.0 211.4 146.4 361.3 2,967.4 25,500.7 38,956.2Financial liabilities:Amounts due to banks 35.2 - - - - - 35.2Other deposits 5,214.5 - - - - - 5,214.5Statutory Debt and HM Treasury loans 26,855.8 - - - - - 26,855.8Derivative financial instruments - 13.0 2.0 11.3 73.6 478.0 577.9Debt securities in issue - 18.5 275.2 35.2 2,631.2 1,721.8 4,681.9Capital instruments - - - - - 131.1 131.1Other financial liabilities - 81.0 - - - - 81.0Total financial liabilities 32,105.5 112.5 277.2 46.5 2,704.8 2,330.9 37,577.4Net liquidity gap (22,336.5) 98.9 (130.8) 314.8 262.6 23,169.8 1,378.8

HM Treasury has indicated that it expects the loan and the WCF provided to the Group by HM Treasury and the Statutory Debt due to theFinancial Services Compensation Scheme to be repaid out of the cash flows generated by the Group during its wind-down. It is not possible tospecify the contractual maturity dates of the loans to the Group from HM Treasury and from the Financial Services Compensation Scheme, andtherefore they have been included in the table above as though repayable on demand.

Debt securities in issue include notes which securitise loans to customers through SPVs. Certain of these notes are repaid on a pass-through orcontrolled amortisation basis. In the above table, maturities of such notes are based on the expected repayment of notes which, in turn, arederived from the expected redemption profiles of securitised loans.

In the above table, where derivatives have been entered into to hedge mortgage backed securitised notes, the timings of derivative paymentsare based on the expected repayment dates of the hedged notes.

As described in note 26, B&B announced in 2010 that it had resolved not to make any payment of principal or interest in respect of capitalinstruments during the period prior to the date on which it repays in full the Statutory Debt. Given the uncertainty of the timing of this, the tableabove includes payments of principal and interest on capital instruments at the earliest date they would have become contractually payable asper the original terms, regardless of the announcement. Capital instruments include perpetual instruments, as shown in note 26; the table aboveassumes these instruments will be redeemed on 31 December 2055.


70



Other assets and liabilities are included in the above table according to the earliest date that payment can be contractually demanded. It shouldbe noted that many financial instruments are settled earlier than their contractual maturity date; in particular, many mortgage loans are repaidearly, in full or in part.

Assets and liabilities with a remaining period to contractual maturity of within one year are classed as current and those with a remaining periodof more than one year are classed as non-current. Non-financial assets and liabilities of the Group amount to £78.2m and £174.8m respectively(2011: £96.9m and £111.5m) of which £4.2m and £18.2m respectively are classed as current (2011: £nil and £26.0m) and £74.0m and £156.6mrespectively are classed as non-current (2011: £96.9m and £85.5m). Non-financial assets and liabilities of the Company amount to £1,066.4mand £178.4m respectively (2011: £1,053.7m and £101.5m) of which £4.2m and £10.5m respectively are classed as current (2011: £nil and£9.0m) and £1,062.2m and £167.9m respectively are classed as non-current (2011: £1,053.7m and £92.5m).

Non-derivative cash flowsThe table below analyses the Group’s and Company's non-derivative cash flows payable into relevant periods. The assumptions used in thepreparation of this table are consistent with those used in the maturity table on pages 70 and 71. The amounts disclosed are the contractualundiscounted cash outflows. These differ from Balance Sheet values due to the effects of discounting on certain Balance Sheet items and dueto the inclusion of contractual future interest flows.

Group

Ondemand

Withinthree

months

Afterthree

monthsbut within

six months


one year

Afterone year


Afterfive years Total

At 31 December 2012 £m £m £m £m £m £m £mFinancial liabilities:Amounts due to banks 1,221.2 - - - - - 1,221.2Statutory Debt and HM Treasury loans 25,424.2 - - - - - 25,424.2Debt securities in issue - 301.9 248.2 418.2 6,246.9 1,594.0 8,809.2Capital instruments - - - - - 585.7 585.7Other financial liabilities - 90.6 - - - - 90.6Loan commitments 139.6 - - - - - 139.6Total 26,785.0 392.5 248.2 418.2 6,246.9 2,179.7 36,270.5

GroupOn

demand

Withinthree

months

Afterthree

monthsbut within

six months

Aftersix months

but withinone year

Afterone year



At 31 December 2011 £m £m £m £m £m £m £mFinancial liabilities:Amounts due to banks 393.7 - - - - - 393.7Statutory Debt and HM Treasury loans 26,855.8 - - - - - 26,855.8Debt securities in issue - 142.5 566.5 250.5 5,824.2 3,845.5 10,629.2Capital instruments - - - - - 545.5 545.5Other financial liabilities - 85.5 - - - - 85.5Loan commitments 110.9 - - - - - 110.9Total 27,360.4 228.0 566.5 250.5 5,824.2 4,391.0 38,620.6

CompanyOn

demand

Withinthree

months

Afterthree

monthsbut within

six months


one year

Afterone year



At 31 December 2012 £m £m £m £m £m £m £mFinancial liabilities:Amounts due to banks 605.6 - - - - - 605.6Other deposits 4,643.8 - - - - - 4,643.8Statutory Debt and HM Treasury loans 25,424.2 - - - - - 25,424.2Debt securities in issue - 195.8 116.4 156.8 3,370.7 527.1 4,366.8Capital instruments - - - - - 585.7 585.7Other financial liabilities - 86.0 - - - - 86.0Loan commitments 114.2 - - - - - 114.2Total 30,787.8 281.8 116.4 156.8 3,370.7 1,112.8 35,826.3


71



CompanyOn

demand

Withinthree

months

Afterthree

monthsbut within

six months

Aftersix months

but withinone year

Afterone year



At 31 December 2011 £m £m £m £m £m £m £mFinancial liabilities:Amounts due to banks 35.2 - - - - - 35.2Other deposits 5,214.5 - - - - - 5,214.5Statutory Debt and HM Treasury loans 26,855.8 - - - - - 26,855.8Debt securities in issue - 19.8 324.5 53.0 3,169.8 1,956.9 5,524.0Capital instruments - - - - - 545.5 545.5Other financial liabilities - 81.0 - - - - 81.0Loan commitments 90.6 - - - - - 90.6Total 32,196.1 100.8 324.5 53.0 3,169.8 2,502.4 38,346.6

Derivative cash flowsThe following table analyses cash outflows for the Group’s and Company's derivative financial liabilities. The amounts are allocated into relevantperiods using assumptions consistent with those used in the preparation of the maturity table on pages 70 and 71.

Group and CompanyOn

demand

Withinthree

months

Afterthree

monthsbut within

six months

Aftersix monthsbut within one year

Afterone year



At 31 December 2012 £m £m £m £m £m £m £mDerivative financial liabilities to be settledon a net basis - 26.2 26.3 44.5 250.7 928.0 1,275.7Derivative financial liabilities to be settledon a gross basis:- Outflows - 0.5 0.5 1.0 7.8 55.4 65.2- Inflows - (0.6) (0.6) (1.3) (10.2) (53.4) (66.1)

Total - 26.1 26.2 44.2 248.3 930.0 1,274.8

Group and CompanyOn

demand

Withinthree

months

Afterthree

monthsbut within

six months

Aftersix months

but withinone year

Afterone year



At 31 December 2011 £m £m £m £m £m £m £mDerivative financial liabilities to be settledon a net basis - 26.0 23.3 41.3 231.4 855.5 1,177.5Derivative financial liabilities to be settledon a gross basis:- Outflows - 0.3 0.3 0.5 4.2 51.9 57.2- Inflows - (0.3) (0.3) (0.5) (4.0) (49.5) (54.6)

Total - 26.0 23.3 41.3 231.6 857.9 1,180.1

Cash flow hedges

Interest Rate Swaps:The notional principal amounts of the outstanding interest rate swap contracts in Cash Flow Hedge Relationships ('CFHR') as at 31 December2012 were £4.6bn (2011:£1.0bn) for Group and Company.

Gains and losses recognised in the cash flow hedge reserve on interest rate swap contracts as at 31 December 2012 will be continually releasedto the Income Statement up until the maturity of the hedging instruments (August 2019).

Cross Currency Swaps:The notional principal amounts of the outstanding cross currency swaps in an eligible CFHR as at 31 December 2012 were £6.3bn in the Group(2011: £7.0bn) and £3.4bn in the Company (2011: £3.8bn).

The hedged transactions denominated in foreign currency are expected to occur at various intervals over the next 34 years. Gains and lossesrecognised in the cash flow hedge reserve on cross currency swap contracts as at 31 December 2012 will be released to the Income Statementduring the periods in which the hedged transactions affect the Income Statement, the latest maturity of these transactions in the Group beingFebruary 2047 and in the Company September 2020.


72


(d) Interest rate riskInterest rate risk typically arises from mismatches between the repricing dates of interest-bearing assets and liabilities on the Group’s/Company'sBalance Sheet, and from the investment profile of the Group’s/Company's capital and reserves. Corporate Treasury is responsible for managingthis exposure within the risk exposure limits set out in the Market Risk policy, as approved by the Board. This policy sets out the nature of themarket risks that may be taken along with aggregate risk limits, and stipulates the procedures, instruments and controls to be used in managingmarket risk.

Market risk is the potential adverse change in income or net worth arising from movements in interest rates, exchange rates or other marketprices. Effective identification and management of market risk is essential for maintaining stable net interest income.

The Group measures, monitors and controls the following interest rate risks and sensitivities:

Mismatch risk Curve Prepayment risk Basis risk Reset risk

Exposures are reviewed as appropriate by senior management and the Board with a frequency between daily and monthly, related to thegranularity of the position.

Interest rate risk exposure is predominantly managed through the use of interest rate derivatives, principally interest rate swaps. TheGroup/Company also use asset and liability positions to offset exposures naturally wherever possible to minimise the costs and risks of arrangingtransactions external to the Group/Company.

Interest rate sensitivities are reported to ALCO monthly and are calculated using a range of interest rate scenarios, including non-parallel shifts inthe yield curve.

The main metrics used by management are:

(i) the change in value of the Group’s net worth due to a notional 2% parallel move in market and base rates.

2012£m

2011£m

2% increase 4.6 3.72% decrease (1.0) (1.1)

(ii) the sensitivity of the Group’s interest margin over 12 months to a notional 2% parallel move in market and base rates.

2012£m

2011£m

2% increase 425.4 402.22% decrease (107.8) (105.0)


73


(e) Foreign currency risk

The Group’s policy is to hedge all material foreign currency exposures by use of naturally offsetting foreign currency assets and liabilities or bythe use of derivatives. Consequently, at 31 December 2012 and 31 December 2011 the Group and Company had no net material exposure toforeign exchange rate fluctuations or changes in foreign currency interest rates. The impact on the Group’s and Company's profit and equity ofreasonably possible changes in exchange rates compared to actual rates would not have been material at 31 December 2012 or 31 December2011.

The table below summarises the Group's and Company's exposure to foreign currency exchange rate risk at the year end, based on theinformation presented to management. Included in the table are the Group's and Company's financial instruments, under the relevant currencyheadings. The amounts disclosed are the sterling equivalents of the notional amounts due on maturity, including interest accrued at the BalanceSheet date, less any impairment provisions.

Group € $ Other TotalAt 31 December 2012 £m £m £m £mFinancial assets:Cash at bank and in hand 1,261.7 23.0 - 1,284.7Investment securities 142.5 95.2 - 237.7Derivative financial instruments 4,501.2 942.9 745.5 6,189.6Total financial assets 5,905.4 1,061.1 745.5 7,712.0

Financial liabilities:Amounts due to banks 1,215.8 - - 1,215.8Derivative financial instruments 110.4 - - 110.4Debt securities in issue 4,569.7 1,042.5 745.9 6,358.1Total financial liabilities 5,895.9 1,042.5 745.9 7,684.3

Net currency gap 9.5 18.6 (0.4) 27.7

Group € $ Other TotalAt 31 December 2011 £m £m £m £mFinancial assets:Cash at bank and in hand 372.4 19.8 - 392.2Investment securities 206.2 87.3 - 293.5Derivative financial instruments 4,669.9 1,032.5 1,131.7 6,834.1Total financial assets 5,248.5 1,139.6 1,131.7 7,519.8

Financial liabilities:Amounts due to banks 358.5 - - 358.5Derivative financial instruments 34.1 - - 34.1Debt securities in issue 4,852.5 1,135.9 1,131.6 7,120.0Total financial liabilities 5,245.1 1,135.9 1,131.6 7,512.6

Net currency gap 3.4 3.7 0.1 7.2


74


(e) Foreign currency risk (continued)

Company € $ Other TotalAt 31 December 2012 £m £m £m £mFinancial assets:Cash at bank and in hand 646.1 23.0 - 669.1Investment securities 142.5 95.2 - 237.7Derivative financial instruments 2,608.4 (117.2) 745.5 3,236.7Total financial assets 3,397.0 1.0 745.5 4,143.5

Financial liabilities:Amounts due to banks 600.2 - - 600.2Other deposits (93.9) (17.5) - (111.4)Derivative financial instruments 110.4 - - 110.4Debt securities in issue 2,770.8 - 745.9 3,516.7Total financial liabilities 3,387.5 (17.5) 745.9 4,115.9

Net currency gap 9.5 18.5 (0.4) 27.6

Company € $ Other TotalAt 31 December 2011 £m £m £m £mFinancial assets:Cash at bank and in hand 13.9 19.8 - 33.7Investment securities 206.2 87.3 - 293.5Derivative financial instruments 2,619.9 (122.5) 1,131.7 3,629.1Total financial assets 2,840.0 (15.4) 1,131.7 3,956.3

Other deposits (19.8) (19.1) - (38.9)Debt securities in issue 2,856.5 - 1,131.6 3,988.1Total financial liabilities 2,836.7 (19.1) 1,131.6 3,949.2

Net currency gap 3.3 3.7 0.1 7.1

(f) Concentration risk

The Group has investments in a range of investment securities issued by government bodies, banks and building societies, and in asset-backedsecurities, in both the UK and overseas. UK government securities, bank and supranational bonds comprise 36% (2011: 42%) of investmentsecurities held. 70% (2011: 62%) of the asset-backed securities are backed by UK assets. Further details in respect of concentrations in thewholesale assets portfolio are given in note 10.

The Group operates primarily in the UK, and adverse changes to the UK economy could impact all areas of the Group’s business. Residentialloans to customers are all secured on property in the UK. 65% (2011: 64%) of residential loans to customers are concentrated in the buy-to-letmarket; most of the remaining balances are secured on residential owner-occupied properties.

The residential loan book of £31.9bn (2011: £33.5bn) is geographically spread across the UK broadly in line with the country’s housing stock.Consequently, there is a geographic concentration of mortgages secured on properties in London and the South-East representing 50% (2011:50%) of the book.

Within the commercial mortgage portfolio and housing association loans, there are 41 loans (2011: 45) totalling £556.5m (2011: £588.5m), withthe largest 10 loans accounting for 93% (2011: 90%) of the portfolio. All of these loans are secured on commercial properties.

35. 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 formerindividual shareholders who subscribed for additional shares in the £401m rights issue approved on 17 July 2008. These former shareholdersclaim to have suffered loss through having been induced to subscribe for shares in the rights issue by allegedly materially misleading and/orincomplete statements made in the associated prospectus dated 24 June 2008 as revised and supplemented by the supplementary prospectusdated 11 July 2008. Should such a claim result in proceedings which are pursued through the courts and which succeed, the defendant directorsand/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&Btogether with its legal advisors responded to the allegations raised. Nothing further was heard until 23 January 2012 when furthercorrespondence 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 todetermine the outcome or timing of any conclusion to this matter. No provision has been made in respect of these allegations.

The Company has provided a number of financial guarantees to other B&B Group companies. The Directors do not expect any claims to bemade against the Company under these guarantees and hence no provision has been made.


75

36. Ultimate controlling party

All shares in the Company were transferred to the Treasury Solicitor as nominee for HM Treasury on 29 September 2008 as a result of TheBradford & Bingley plc Transfer of Securities and Property etc. Order 2008. On 1 October 2010 all shares in the Company were acquired via ashare-for-share exchange by UK Asset Resolution Limited, a private limited company incorporated and domiciled in the United Kingdom, whichis wholly owned by the Treasury Solicitor as nominee for HM Treasury and is the Group's ultimate parent undertaking. UK Asset ResolutionLimited heads the largest and smallest group of companies into which the Financial Statements of B&B are consolidated. Copies of the financialstatements of UK Asset Resolution Limited may be obtained from the Company Secretary, Croft Road, Crossflatts, Bingley BD16 2UA. TheCompany considers Her Majesty's Government to remain its ultimate controlling party.

37. Events after the reporting period

The Directors are of the opinion that there have been no significant events which have occurred since 31 December 2012 to the date of this reportthat are likely to have a material effect on the Group's or the Company's financial position as disclosed in these Financial Statements.


Bradford & Bingley plc, Registered Office: Croft Road, Crossflatts, Bingley, West Yorkshire BD16 2UA

Registered in England and Wales under company number 03938288 www.bbg.co.uk

bradford & bingley plc annual report & accounts...

Documents