Report and Cessation Accounts For the period ended … and Cessation Accounts For the period ended 31 July 2009 1 of 120 Directors’ report Business review The period covered by this

Britannia Building Society Report and Cessation Accounts

For the period ended 31 July 2009

1 of 120

Directors’ report

Business review

The period covered by this review is 1 January 2009 to 31 July 2009. On 1 August 2009, the Society

transferred its engagements to The Co-operative Financial Services (‘CFS’), following approval by its

members and confirmation by the Financial Services Authority (‘FSA’).

This report has been prepared by the Cessation Accounts Committee (‘the Committee’), a Committee

comprising six former directors of the Society, namely Rodney Baker-Bates, Neville Richardson, Phil Lee,

Tim Franklin, Chris Jones and Stephen Kingsley. A statement of the responsibilities of the directors and the

Committee in respect of the preparation of the Report, Cessation Accounts and the Annual Business

Statement is set out on pages 6 and 7.

During the period, the Society remained focused on its mission to become known as Britain’s best mutual

whilst undertaking the extensive planning and integration activity required to ensure the successful

completion of the merger with CFS – the first ever merger between two different types of mutually-owned

businesses.

Basis of preparation

The accounts have been prepared on a going concern basis as the entire business of the Group and the

Society has continued to operate within the CFS business from 1 August 2009.

Results for the period

Challenging market conditions and the low interest rate environment, with base rates at an all time low of

0.5%, have had a significant impact on the Group’s interest margins. Despite this, the Group delivered

strong profits with pre-tax operating profit, before charging costs of £26.9 million relating to the merger with

CFS, for the period of £70.7 million (2008 full year : £23.2 million). During the period the Society purchased

£99.5 million of its own subordinated debt and £99.1 million of structured debt issued by its Leek

securitisation vehicles. These transactions resulted in a profit of £57.9 million recognised through gains less

losses from other financial instruments. Consistent with its previous practice, and in line with its risk

management policies, the Group continued to close out swap positions during the period generating

significant profits. These are included within gains less losses from derivative financial instruments for the

period of £45.0 million (2008 full year : £25.3 million).

At 31 July 2009, total assets stood at £34.0 billion, a decrease of £3.2 billion from the year end position.

Mortgage balances had fallen to £23.8 billion (2008 : £24.2 billion) due to constrained market conditions and

management actions to retain the organisation’s focus on balance sheet strength rather than growth. Net

lending in the period totalled £(480) million (2008 : £(1,462) million). Since the end of 2008 total share

balances fell slightly by £0.5 billion, to £18.2 billion.

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Liquid assets, in the form of cash and authorised investments were £8.2 billion, representing 29.2% of share

and deposit liabilities (2008 : 33.5%). In 2008, the Bank of England launched its Special Liquidity Scheme

which allows banks to swap their high quality mortgage-backed and other securities for UK treasury bills for a

defined period. In common with many banks and building societies, the Group has used this facility as an

efficient way of maintaining a high level of liquidity. In 2009 the Society issued a £1.4 billion covered bond to

enable it to access this scheme.

The Group recognised net increases in the fair value of investment securities carried at fair value of £12.0

million (2008 : reduction of £40.8 million) during the period through the available-for-sale reserve. These

increases in fair value will only be realised if the Group chooses to sell the investment securities before they

reach maturity, at which point they are expected to be redeemed at face value.

Total Group capital remained at a healthy level, standing at 14.1% (2008 : 13.8%) under the Financial

Services Authority’s new capital adequacy requirements.

Key performance indicators

The Group managed its performance using a balanced scorecard approach and Key Performance Indicators

(KPIs). KPIs of the Group (other than profit) include three financial indicators and two non-financial

indicators.

The financial indicators were:

• Member Business net interest margin. The Society continued to demonstrate high value to members

through competitive rates for both mortgagors and savers and kept the net interest margin at below 1%;

• Management expenses as a percentage of mean total assets under management. The Group

maintained a strong focus on managing ongoing expenses but the reduction in assets resulted in the

ratio of management expenses as a percentage of mean total assets under management increasing

slightly to 0.64% (2008 : 0.62%). This ratio has been calculated on an annualised basis and excludes

impairment losses for counterparties, merger costs and compensation levies.. Exceptional costs of

£26.9 million relating to the merger and integration with CFS were charged in the period; and

• Britannia Membership Reward (BMR) - a BMR payment of £20.0 million has been accrued for the period

to 31 July 2009. The final amount to be paid out will be dependent on profits of the Britannia business

over the full calendar year and will be approved by the CFS Board in 2010.

The non-financial indicators were:

• Customer satisfaction. The Group has maintained its impressive record of customer advocacy with

some 88% of members saying that they would recommend Britannia; and

• Employee satisfaction. Our independent surveys show that 95% of our people were proud to work for

Britannia.

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Principal risks and uncertainties and financial risk-management objectives and policies

The Group as a whole had a low appetite for risk and actively sought to mitigate its exposure to risks and

uncertainties, particularly so in the ongoing challenging market conditions during the period.

The Group’s objective was to minimise the impact of financial risks upon its performance. The key risks

faced by the business were credit risk, liquidity risk, market risk and operational risk. A high-level summary

of these risks and uncertainties is included below and more detail is included in Notes 51 - 57 to the

accounts:

• Credit risk is the risk that customers or treasury counterparties cannot meet their obligations to us

as they become due. Credit risk for the Group arose from loans to retail and commercial customers,

the liquid and investment assets held and from derivative contracts with other banks. The economic

circumstances made identification and management of credit risk more challenging due to the

heightened risk of customer and counterparty default and the difficulty in estimating the expected

cash flows where loans were identified as impaired. The Group’s processes for identifying,

evaluating and managing this risk are set out in Note 52 to the accounts;

• Liquidity risk is the risk of having insufficient liquid assets to fulfil obligations or liabilities as they

become due, or the risk that the cost of raising liquid funds is too expensive or sufficient wholesale

funds are not available. The Group’s processes for identifying, evaluating and managing this risk

are set out in Note 53 to the accounts;

• Market risk is the risk that the value of, or income or costs arising from, the Group’s assets and

liabilities change as a result of changes in interest rates, exchange rates or FTSE indices. The

Group used derivative financial instruments to manage, or hedge, these risks. The Group’s

processes for identifying, evaluating and managing this risk are set out in Note 54 and the approach

to hedging is set out in Note 55 to the accounts; and

• Operational risk is the risk of loss arising from poor or failed processes or systems, human error or

external events. The Group’s processes for identifying, evaluating and managing this risk are set

out in Note 57 to the accounts.

The Group managed these risks through a risk-management framework, Board policies and its Treasury and

Credit Risk departments. A number of committees, including the Audit Committee, Asset and Liability

Committee and the Group Credit Committee supported the Board in the measurement and management of

these risks.

Disclosure of information to the auditors

The Committee confirms that, so far as it is aware, there is no relevant audit information of which the

Society’s auditors are unaware and that it has taken all steps that it ought to have taken to make itself aware

of any relevant audit information and to establish that the Society’s auditors are aware of that information.

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Directors

The Directors of the Society during the period to 31 July 2009 were:

Rodney Baker-Bates *

Keith Cameron *

Tim Franklin

Bill Gordon (retired 21 April 2009)*

Francis Gugen *

Peter Harvey *

Chris Jones *

Stephen Kingsley *

Phil Lee

David McCarthy

Neville Richardson

Bridget Rosewell *

Tom Sawyer *

* Non-executive director

Francis Gugen ceased to hold office as a director on 19 September 2008 in accordance with Rule 24(1)b of

the Society’s rules as a result of ceasing to hold in his own right a shareholding of not less than £1,000. This

was due to a personal oversight on the part of Mr Gugen and, upon becoming aware of it, Mr Gugen

promptly informed the Board, opened a new investment account and was re-appointed by the Board as a

non-executive director of the society on 24 February 2009. The Board has satisfied itself that no decisions of

the Board or any committees of the Board on which Mr Gugen served would have been affected by these

facts but has nevertheless ratified all such decisions taken during the period that Mr Gugen had ceased to

hold office.

On 1 August, the Society transferred its engagements to CFS. Tim Franklin, Phil Lee and Neville Richardson

were appointed as Directors and Rodney Baker-Bates, Peter Harvey, Chris Jones and Stephen Kingsley as

Non-executive Directors of CFS following the merger.

None of the Directors had any interest in the share capital of the Society’s connected undertakings at any

time during the financial period.

Employees

The Society was an equal opportunity employer and it gave full consideration to all applications for

employment from disabled people. All applicants for roles within the Group were assessed solely on their

ability to carry out the role. If existing staff members became disabled then every effort was made to

maintain their position or, if this was not possible, to provide appropriate training to enable them to take on a

role elsewhere in the Group.

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'Being a great place to work, grow and develop' was one of the Society’s givens. The Britannia Management

Academy (BMA) training programme continued to run through the period to ensure that our managers had

the necessary understanding, tools and support to manage and develop our people. The Society also

recognised the importance of effective communication with its people. Such communication included an

active intranet site, in-house publications and regular team briefings. The Society’s internal staff satisfaction

survey, Viewpoint, continued to show industry-leading levels of staff satisfaction. Overall employee

satisfaction stood at 94% (2008 : 95%).

Fixed assets

The directors consider the estimated market value of the Group’s interest in land and buildings to be not less

than its net book value at 31 July 2009.

Creditor payment policy

The Group paid supplier invoices for the complete provision of goods and services (unless there was an

express provision for stage payments) in full conformity with the terms and conditions of the purchase and

within agreed payment terms. The Group’s policy was to agree the terms of payment at the start of trading

with the supplier, ensure that suppliers are aware of the terms of payment and pay in accordance with its

contractual and other legal obligations.

Creditor days at 31 July 2009 were 12 days (2008 : 13 days).

Charitable and political donations

During the period, the Society and its subsidiaries made donations to charities and other deserving causes

totalling £244,000. Some £214,000 of this total was allocated through the Britannia Building Society

Foundation. No contributions were made for political purposes.

Statement of directors’ responsibilities

In respect of the preparation of the Report, Cessation Accounts and the Annual Business Statement

The Cessation Accounts Committee (‘the Committee’) comprising certain former Directors of the Society, is

responsible for preparing the Directors’ Report, the Corporate Governance Report, the Cessation Accounts

and the Annual Business Statement in accordance with applicable law and regulations.

The Building Societies Act 1986 requires the Committee to prepare Group and Society accounts for the

financial period to 31 July 2009. Under that law it is required to prepare the Group Cessation Accounts in

accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and applicable

law and has elected to prepare the Society Cessation Accounts on the same basis.

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The Group and Society Cessation Accounts are required by law and IFRS, as adopted by the EU, to present

fairly the financial position and the performance of the Group and the Society at the end of the financial

period. In preparing the Group and Society Cessation Accounts the Committee is required to:

• choose appropriate accounting policies and apply them consistently;

• make reasonable and prudent judgments and estimates;

• state whether applicable accounting standards have been followed, subject to any material

departures disclosed and explained in the Cessation Accounts; and

• prepare the Cessation Accounts on the going-concern basis, unless it is inappropriate to presume

that the Group and Society would have been able to continue in business had it so chosen.

In addition to the Cessation Accounts, the Act requires the Committee to prepare an Annual Business

Statement and a Directors’ Report, each containing prescribed information relating to the business of the

Group.

In respect of accounting records and internal control

The former Directors were responsible for ensuring that the Society and its connected undertakings:

• kept accounting records in accordance with the Building Societies Act 1986; and

• took reasonable care to establish, maintain, document and review such systems and controls as are

appropriate to its business in accordance with the rules made by the Financial Services Authority

under the Financial Services and Markets Act 2000.

The former Directors had general responsibility for taking such steps as were reasonably open to them to

safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

The former Directors were responsible for the maintenance and integrity of the corporate and financial

information included on the Society’s website.

Legislation in the UK, governing the preparation and dissemination of cessation accounts may differ from

legislation in other jurisdictions.

Appointment of auditors

Following the transfer of engagements to CFS, PriceWaterhouseCoopers LLP will retire as auditors.

Rodney Baker-Bates

Committee Chairman

On behalf of the Cessation Accounts Committee

22 October 2009

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Corporate governance report

The Board directed and supervised the Group, providing leadership within a framework of prudent and

effective controls, which enabled risk to be assessed and managed. During the period under review, the

Board met on 12 occasions. The Board set strategic aims to ensure that the necessary financial, human and

other resources were in place for Britannia to meet its objectives, and reviewed management performance.

Throughout the period, the Group complied with the Interim Prudential Sourcebook for Building Societies and

the Integrated Prudential Sourcebook as applicable. These are issued by the Financial Services Authority

and include guidance for boards and management. The Group complied with all relevant aspects of the

Combined Code of Best Practice on Corporate Governance.

The Board assessed all of its non-executive directors as being independent in accordance with the criteria

set out in the Code. All Board members had access to the director of corporate governance for any further

information they required. Independent professional advice was available to directors in appropriate

circumstances at the Society’s expense, and Britannia had arranged insurance cover in respect of legal

action against the directors and officers.

The directors maintained a schedule of reserved matters, which were solely for the decision of the Board, for

example the maintenance of the corporate plan and the approval of annual budgets and treasury policy.

Other matters were delegated to the group executive board and senior management as appropriate, for

example product and services development, staffing and marketing. All directors received regular

information about the Group so that they could play a full part in Board meetings.

Directors submitted themselves for re-election every three years and new directors were historically

appointed to the Board on the recommendation of the nominations committee. No new Board appointments

were made in the period under review. Since April 2001, non-executive directors’ tenure could not exceed

seven years. Prior to this the maximum was ten years. The normal retirement age was 60 for executive

directors and 70 for non-executive directors.

In view of the merger with CFS the annual review of the effectiveness of the Board was not carried out.

The Board was ultimately responsible for the Group’s system of internal control (including ongoing reviews of

effectiveness). Through the audit committee, the Board conducted a continuous rigorous review of the

Group’s systems of internal control, which were considered to have been satisfactory through the period.

The review encompassed all material controls, including financial, operational and compliance controls and

risk management systems.

The Board determined the overall risk appetite strategy and owned the Individual Capital Adequacy

Assessment Process, the business’s own review of how well its capital resources met its expected needs, as

required by the Financial Services Authority. The Group had a formal structure for managing risk, including

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established risk limits, reporting lines, mandates and other controls. The Board reviewed this structure

regularly in line with new requirements from regulators.

Day-to-day management of the Group was devolved by the Board to the group executive board. Several

sub-committees acted for the Board to ensure that non-executive directors had a direct role in Britannia’s

corporate governance.

The assets and liabilities committee managed and controlled the balance sheet exposures of the Group. The

committee developed, reviewed and maintained the long-term funding policy, agreed, implemented and

reviewed short-term funding plans, formulated long- and short-term views on interest rate movements and

decided on appropriate courses of action and set and reviewed treasury policy exposure limits within

parameters agreed by the Board. The committee also approved and monitored the Basel treasury rating

systems.

The nominations committee consisted of all members of the Board and met to review the composition of the

Board and its sub-committees, to review the Group approach to the management of high potential talent and

to ensure that Britannia had robust succession plans in place to cover key roles within the business.

The remuneration committee comprised four non-executive directors. The committee met twice in the period

and ensured that Britannia could attract and retain the right people to manage the business by offering

appropriate rewards and incentives.

The audit committee comprised three non-executive directors. The committee oversaw the Group’s internal

controls, accounting policies and financial reports, and monitored compliance with legal and regulatory

requirements. It also liaised with the Group’s external auditors. The committee met five times in the period

and maintained regular contact with key personnel including the head of group risk, the group compliance

officer, the group money laundering reporting officer, the group chief internal auditor, the business leaders

for financial control and financial management, and the internal auditors.

The Group’s external auditors undertook non-audit services, including the provision of advice on taxation

matters. Audit and non-audit fees of external auditors were approved by the audit committee and auditor

objectivity and independence were safeguarded by competitive tendering and regular appraisal.

The Britannia Treasury Services (BTS) sub-committee dealt primarily with initial approval of asset purchases

and sales, and approval of significant changes in BTS policy or strategy.

The group credit committee ensured that lending policies and exposure limits supported the Group strategy,

taking due account of external influences on the markets in which we operated together with the associated

risks and actual performance. The committee approved and monitored the ongoing performance of Basel

rating systems for retail and commercial credit risk. The committee helped the Board to define the Group’s

risk appetite for lending by monitoring the quality of new and existing lending to ensure appropriate action

was taken to mitigate risk.

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The number of Board and committee meetings attended by each director during the period to 31 July

is shown in the table below:

Board

(12 in period)

Audit

(5 in period)

Assets and

Liabilities

(8 in period)

Remuneration

(2 in period)

Nominations

(2 in period)

Britannia

Treasury

Services

(6 in period)

Group

Credit

(7 in period)

Rodney

Baker-Bates

11

(chair) 1 1

2

(chair)

Keith

Cameron 11 1

Tim Franklin 10 8 (chair) 7

Bill Gordon

(retired

21.04.2009)

8 (member

until

21.04.2009)

2

2 (member

until

17.02.2009)

Francis

Gugen

(see note in

directors’ report

on page 5)

11 5

Peter Harvey 9 7 5

Chris Jones 12 2

(chair) 6

Stephen

Kingsley 11 5

Phil Lee 12 5 3

3 (member

until

24.03.2009)

David

McCarthy 12 8 6 5

Neville

Richardson 11 7 2

6

(chair) 6

Bridget

Rosewell 11

5

(chair)

Tom Sawyer 7 2

Rodney Baker-Bates

Committee Chairman

On behalf of the Cessation Accounts Committee

22 October 2009

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11 of 120

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Consolidated income and expenditure account

for the 7 months ended 31 July 2009

7 months

ended

12 months

ended

31 July 31 December

2009 2008

£m £m

Interest receivable and similar income 1 522.9 2,107.2

Interest expense and similar charges 2 (400.6) (1,799.7)

Net interest income 122.3 307.5

Fee and commission income 3 34.3 62.0

Fee and commission expense 4 (18.9) (16.0)

Net fee and commission income 15.4 46.0

Gains less losses from derivative financial instruments 6 45.0 25.3

Gains less losses from investment securities 26 6.2 14.6

Gains less losses from other financial instruments 7 57.9 -

Other operating income 8 3.2 5.8

Total other operating income 112.3 45.7

Total income 250.0 399.2

Administrative expenses 9 (122.5) (209.9)

Merger costs 9 (26.9) -

Depreciation and amortisation 13 (16.3) (31.1)

Impairment losses on loans and advances to customers 23 (45.3) (57.8)

Impairment losses on counterparties 24 3.0 (57.4)

Provision for additional compensation schemes levies 42 1.8 (19.8)

Operating profit 43.8 23.2

Share of post-tax (losses)/profits from joint ventures 28 (0.1) 0.6

Profit before tax and Britannia Membership Reward 43.7 23.8

Britannia Membership Reward 14 (18.9) (18.4)

Profit before tax 24.8 5.4

Taxation 15 (6.6) (0.2)

Net profit 48 18.2 5.2

Consolidated statement of other comprehensive income


7 months

ended

12 months

ended

31 July 31 December

2009 2008

£m £m

Net profit for the period 48 18.2 5.2

Movement in fair value of available-for-sale assets 49 12.0 (40.8)

Cashflow hedging gain/(loss) 50 29.0 (47.7)

Actuarial gain on pension plan 46 1.9 21.8

Amount of pension surplus not recognised under IAS 19 46 (4.7) (99.8)

Tax on items through equity other than the income and expenditure account (10.8) 46.6

Total comprehensive income 45.6 (114.7)

The accounting policies and notes on pages 18 to 111 form part of these accounts.

Notes

Notes

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Society income and expenditure account


7 months

ended

12 months

ended

31 July 31 December

2009 2008

£m £m

Interest receivable and similar income 1 436.0 1,795.8

Interest expense and similar charges 2 (369.5) (1,578.7)

Net interest income 66.5 217.1

Fee and commission income 3 11.6 20.5

Fee and commission expense 4 (5.4) (3.7)

Net fee and commission income 6.2 16.8

Income from investments 5 50.4 28.0

Gains less losses from derivative financial instruments 6 45.1 23.0

Gains less losses from investment securities 26 5.0 14.9

Gains less losses from other financial instruments 7 36.5 -

Other operating income 8 1.5 5.1

Total other operating income 138.5 71.0

Total income 211.2 304.9

Administrative expenses 9 (99.5) (169.8)

Merger costs 9 (26.9) -

Depreciation and amortisation 13 (13.8) (27.4)

Impairment losses on loans and advances to customers 23 5.2 (9.7)

Impairment losses on counterparties 24 3.0 (57.4)

Provision for additional compensation schemes levies 42 2.1 (19.8)

Operating profit before tax and Britannia Membership Reward 81.3 20.8

Britannia Membership Reward 14 (18.9) (18.4)

Profit before tax 62.4 2.4

Taxation 15 (12.3) 7.5

Net profit 48 50.1 9.9

Society statement of other comprehensive income


7 months

ended

12 months

ended

31 July 31 December

2009 2008

£m £m

Net profit for the period 48 50.1 9.9

Movement in fair value of available-for-sale assets 49 13.4 (42.7)

Cashflow hedging gain/(loss) 50 26.8 (45.0)

Actuarial gain on pension plan 46 1.9 21.8

Amount of pension surplus not recognised under IAS 19 46 (4.7) (99.8)

Tax on items through equity other than the income and expenditure account (10.5) 46.3

Total comprehensive income 77.0 (109.5)


Notes

Notes

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At 31 July At 31 December

2009 2008

Notes £m £m

17 591.8 275.0

18 972.5 1,789.8

19 23,752.9 24,248.6

19 370.2 538.8

25 5,206.5 6,133.6

26 1,381.6 2,033.4

27 1,086.6 1,583.7

28 2.1 2.2

29 194.8 194.8

30 36.4 39.7

31 131.1 105.5

32 72.6 78.2

33 52.5 53.2

34 18.0 10.7

35 122.2 129.5

46 - -

33,991.8 37,216.7

36 16,631.5 17,234.1

37 1,593.2 1,480.4

38 6,117.6 6,936.8

39 1,678.0 2,054.5

27 721.1 715.7

40 4,329.4 5,233.5

40 632.9 1,193.8

41 54.1 55.9

42 14.2 24.3

43 207.8 173.0

44.3 24.0

44 530.9 691.7

45 318.7 326.5

32,873.7 36,144.2

48 1,219.6 1,203.5

49 (88.8) (97.4)

50 (12.7) (33.6)

33,991.8 37,216.7


Rodney Baker-Bates Neville Richardson

(On behalf of the Cessation Accounts

Committee)

These financial statements have been approved for issue by the Cessation Accounts Committee on 22 October 2009.


Committee)

Cash and balances with the Bank of England

Loans and advances to banks

Loans and advances to customers

Fair-value adjustments for hedged risk

Investment securities - loans and receivables

Derivative financial instruments

Investments in joint ventures

Goodwill

Property, plant and equipment

Deferred tax assets

Retirement benefit asset

Total assets

Other assets

Current taxes

Deposits from banks

Other deposits


Debt securities in issue


Other liabilities

Provisions for liabilities and charges

Accruals and deferred income

Guaranteed equity bonds

Prepayments and accrued income

Shares

General reserve

Liabilities

Subordinated liabilities

Subscribed capital

Total liabilities

Available-for-sale reserve

Cashflow hedging reserve

Total equity and liabilities

Assets

Investment properties

Group statement of financial position

Investment securities - available-for-sale

Intangible assets

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At 31 July At 31 December

2009 2008

Notes £m £m

17 591.8 275.0

18 326.5 1,289.6

19 12,151.0 12,348.6

19 284.6 408.8

25 5,284.6 6,133.6

26 1,381.6 1,979.6

27 733.1 904.6

28 70.1 65.2

29 157.9 157.9

30 33.6 36.3

32 57.9 62.9

33 22.4 38.3

34 11,129.9 9,324.9

35 120.6 127.8

46 - -

32,345.6 33,153.1

36 16,631.5 17,234.1

37 1,528.5 1,413.6

38 5,629.4 6,282.8

39 405.5 828.2

27 613.6 580.5

40 1,723.5 2,294.3

40 269.9 496.4

41 3,544.5 1,955.5

42 12.9 22.9

43 173.5 144.9

4.5 -

44 530.9 691.7

45 318.7 326.5

31,386.9 32,271.4

48 1,058.9 1,010.9

49 (88.8) (98.5)

50 (11.4) (30.7)

32,345.6 33,153.1


Rodney Baker-Bates


Committee)

Other deposits


Committee)

These financial statements have been approved for issue by the Cessation Accounts Committee on 22 October 2009.

Neville Richardson

Cashflow hedging reserve

Total equity and liabilities

Subscribed capital

Intangible assets

Goodwill

Other assets


Shares - guaranteed equity bonds

Liabilities

Prepayments and accrued income

Retirement benefit asset

Total assets

Investment securities - loans and receivables


Investments


Assets

Society statement of financial position

Cash and balances with the Bank of England

Subordinated liabilities

General reserve

Available-for-sale reserve

Total liabilities

Provisions for liabilities and charges

Accruals and deferred income

Current taxes





Other liabilities

Shares

Deposits from banks


Deferred tax assets


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Statement of cash flows


Group Group Society Society

7 months

ended

12 months

ended

7 months

ended

12 months

ended

31 July 31 December 31 July 31 December

2009 2008 2009 2008

£m £m £m £m

Cash flows from operating activities 59 (1,632.8) (666.6) (1,569.3) (774.5)

Cash flows from investing activities

Purchase of investment securities (6,774.5) (23,838.7) (6,744.8) (23,823.6)

Proceeds from sale and maturity of investment

securities 6,830.8 23,245.0 6,680.3 23,223.7

Purchase of investment property (26.7) (105.6) - -

Proceeds from sale of investment property 0.1 - - -

Investment in share capital of subsidiaries - - (4.9) (15.0)

Purchase of property, plant and equipment (1.6) (8.7) (1.5) (7.9)

Proceeds from sale of property, plant and

equipment 0.7 4.4 0.6 4.4

Intangible asset additions (5.2) (13.3) (4.9) (11.3)

Income from investments - - 50.4 28.0

Net cash flows from investing activities 23.6 (716.9) (24.8) (601.7)

Cash flows from financing activities

Repayment of subordinated liabilities (62.5) - (62.5) -

Interest paid on subordinated liabilities (12.0) (35.5) (12.0) (35.5)

Interest paid on subscribed capital (13.1) (28.9) (13.1) (28.9)

Net cash flows from financing activities (87.6) (64.4) (87.6) (64.4)

Net decrease in cash (1,696.8) (1,447.9) (1,681.7) (1,440.6)

Cash and cash equivalents at start of period 59 3,002.3 4,450.2 2,980.8 4,421.4

Cash and cash equivalents at end of period 59 1,305.5 3,002.3 1,299.1 2,980.8

Notes

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Statement of accounting policies

On 1 August 2009, the engagements of the Group were transferred to The Co-operative Financial Services

(‘CFS’). Accordingly, the Cessation Accounts of the Group and Society have been prepared immediately

prior to this transfer and represent a period shorter than one year. Therefore, comparative amounts for the

income and expenditure accounts, statements of comprehensive income, statements of cash flows and

related notes are not entirely comparable.

The accounts have been prepared on a going-concern basis as the entire business of the Group and Society

has continued to operate within the CFS business from 1 August 2009.

Basis of presentation

The Group’s consolidated financial statements have been prepared under the historical cost convention as

modified by the revaluation of available-for-sale financial assets and all derivative contracts.

The Group is required to prepare its consolidated financial statements in accordance with International

Financial Reporting Standards (IFRSs) adopted by the European Union, interpretations issued by the

International Financial Reporting Interpretations Committee (IFRIC) and with those parts of the Building

Societies (Accounts and Related Provisions) Regulations 1998 applicable to organisations reporting under

IFRS.

The Group has adopted the following pronouncements in these accounts:

• IFRS 8 Operating Segments, which requires that information on operating segments is reported based on how it is reported and evaluated internally (see Note 16);

• IAS 1 Presentation of Financial Statements (revised) which fundamentally revises the format of the financial statements; and

• IAS 23 Borrowing Costs (revised) which requires that borrowing costs on assets that take a substantial time to prepare for intended use or sale must be capitalised.

Other pronouncements include:

• IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements –

portable financial instruments and obligations arising on liquidations (amended);

• IFRS 3 Business Combinations (revised);

• IAS 27 Consolidated and Separate Financial Statements (amended); and

• IFRICs 13,15,16,17 and 18.

The above pronouncements, while mandatory for the period ended 31 July 2009, are not relevant to the

Britannia Group.

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Consolidation

The financial information of the Group incorporates the assets, liabilities and results of Britannia Building

Society and its subsidiaries. Subsidiaries include special purpose entities (SPEs) as defined below.

Subsidiaries

Subsidiaries are entities over which the Group can exercise control, particularly of their financial affairs and

operating policies.

In the Group accounts, subsidiaries are fully consolidated from the date on which control is transferred to the

Group. Identifiable assets acquired, including intangible assets and liabilities and contingent liabilities

assumed in a business combination are measured initially at their fair values at the acquisition date. The

excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets

acquired is recorded as goodwill.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are

eliminated.

In the Society accounts, investments in subsidiary undertakings are stated at cost less provisions for any

impairment in value.

Special purpose entities

The Group’s SPEs, entities created to accomplish a narrow and well defined objective, include

• various securitisation transactions in which it sold mortgages to SPEs. The equity of these SPEs is

not owned by the Group; and

• a covered bond transaction, in which a limited liability partnership was established to act as

guarantor for the covered bond issue.

In accordance with the Standing Interpretations Committee (SIC) Interpretation 12, the Group is deemed to

have control over the SPEs and therefore they are included as subsidiaries in the consolidated financial

statements. The Group continues to recognise the securitised assets as loans and advances to customers

on the balance sheet and income from the securitised assets continues to be recognised as Group income.

Interests in joint ventures

The Group’s interests in joint ventures are accounted for using the equity method. Under this method the

Group’s share of profits or losses is recognised in the income and expenditure account and the Group’s

share of net assets is shown on the balance sheet.

Foreign currency translation

Functional and presentation currencies

The consolidated financial statements are presented in sterling, which is the Group’s functional currency (ie

the primary currency in which it transacts business) and presentation currency.

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Transactions and balances

Foreign currency transactions are converted into sterling using the exchange rates prevailing at the dates of

the transactions. Foreign exchange gains and losses resulting from the conversion and settlement of

currency transactions and from the translation at period-end exchange rates of monetary assets and

liabilities denominated in foreign currencies (for example, certain investments and Euro- and US dollar-

denominated debt securities) are recognised in the income and expenditure account.

Interest income and expense

This comprises:

• interest income and expense for financial assets and financial liabilities at amortised cost, calculated

using the effective-interest-rate method. This includes accrued interest income on financial assets

written down as a result of an impairment; and

• interest income and expense on available-for-sale investments and derivatives, which are measured

at fair value.

All derivative financial instruments are entered into for the purpose of hedging exposures. Interest income or

expense on derivative financial instruments that are hedging assets is included in interest receivable and

similar income. Interest income or expense on derivative financial instruments that are hedging liabilities is

included in interest expense and similar charges.

Effective interest rate

The effective interest rate (EIR) is calculated at initial recognition by discounting the asset’s or liability’s

estimated future cash flows back to its net carrying amount over its expected life.

The main impact for the Group is in relation to income from ‘loans and advances to customers’. The EIR

calculation includes application fees charged to customers, broker fees payable, mortgage discounts and

incentives, and estimates of future early repayment fees. The calculation makes no allowance for losses

arising from non-payment by customers.

The calculation requires assumptions to be made, particularly regarding the expected lives of future cash

flows relating to the asset or liability, using both historical data and management judgments. These

assumptions are monitored, regularly reviewed and amended when necessary. The carrying amounts of

assets and liabilities are amended to reflect actual and revised estimated cash flows. The entity recalculates

the carrying amount by computing the present value of estimated future cash flows at the financial

instruments’ original effective interest rate.

Fee and commission income

Fee and commission income other than that directly related to loans is recognised over the period for which

the service has been provided, or on completion of an act to which the fee relates.

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Britannia Membership Reward

A liability for the Britannia Membership Reward is recognised when a payment has been approved by the

Board. It is disclosed separately in the income and expenditure account in view of its size and importance.

The liability is included within other liabilities in the balance sheet.

Tax

Tax on the profit for the period comprises current tax and deferred tax.

Current tax

The expected tax payable on the results for the period is called current tax. It is calculated using the tax rates

in force at the balance sheet date. The current tax charge includes adjustments to tax payable in prior

periods.

Deferred tax

Deferred tax is provided in full using the liability method where there are temporary differences between the

carrying value of assets and liabilities for accounting and for tax purposes.

Deferred tax is calculated using the tax rates that are expected to apply when the related deferred tax asset

is realised or deferred tax liability is settled.

The principal temporary differences arise due to:

• differences in the accounting and tax treatment of payments made into the pension scheme;

• provisions for loan impairment in the accounts not immediately deductible for tax purposes;

• differences in depreciation and capital allowance rates used for taxation;

• differences in tax rules for securitisation companies; and

• tax losses carried forward.

Tax losses available to carry forward and other deferred tax assets are only recognised as assets where it is

probable that there will be future taxable profits against which to offset them.

Movements in deferred tax are recognised in the income and expenditure account except when they relate to

items such as unrealised profits or losses on available-for-sale investments taken directly to reserves. In

such cases the tax is also recognised directly in reserves and is subsequently recognised in the income and

expenditure account at the same time as the related profit or loss is realised.

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Financial assets

Classification

The Group’s financial assets are categorised as follows:

a. Loans and receivables

Loans and receivables are assets with fixed or determinable payments that are not quoted in an active

market. They include:

• cash and balances with the Bank of England;

• loans and advances to banks;

• loans and advances to customers; and

• investment securities reclassified from ‘available-for-sale’, or acquired, during an inactive market.

b. Available for sale

Investment securities available for sale are assets held principally to manage the Group’s liquidity. They are

generally debt instruments that are held until they mature, although they may be sold in response to needs

for liquidity or changes in interest rates. Where the market in such assets became inactive in 2008, the

Group reclassified such assets as loans and receivables in accordance with the amendments to IAS 39

Financial Instruments : Recognition and Measurement and IFRS7 Financial Instruments : Disclosures.

c. Financial assets at fair value through income or expense

This category covers assets acquired principally for the purpose of selling in the short term or those

designated at initial recognition by management. It includes:

� pledged assets; and

� derivative financial instruments (unless they are designated as effective hedges).

The Group’s derivatives can be split into three categories:

• derivatives that meet the conditions for applying hedge accounting;

• derivatives that provide economic hedges against underlying items but do not meet conditions for

applying hedge accounting; and

• derivatives that were acquired to hedge other financial instruments, but that no longer meet the

conditions for applying hedge accounting.

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Recognition and derecognition

Financial assets at fair value through income and expense are initially recognised at fair value on the date

that the Group commits to purchase the asset. The fair values of quoted instruments in active markets are

based on current bid prices. The fair values of investments where there is no active market or the securities

are unlisted are based on valuation techniques including discounted-cashflow analysis, with reference to

relevant market rates, and other commonly used valuation techniques. Associated transaction costs are

taken directly to the income and expenditure account. Gains and losses arising from changes in fair values

are included in the income and expenditure account in the period in which they arise.

Loans and receivables are recognised at fair value when the cash is advanced. They are carried at

amortised cost using the EIR method, with all movements being recognised in the income and expenditure

account.

Available-for-sale assets are initially recognised at fair value on the date that the Group commits to purchase

the assets. Subsequent movements in fair values are recognised directly in reserves. The fair values of

quoted investments in active markets are based on current bid prices. The fair values of investments where

there is no active market or the securities are unlisted are based on valuation techniques including

discounted-cashflow analysis and other commonly used valuation techniques.

Financial assets are derecognised when:

• the rights to receive cash flows from the assets have ceased; or

• the Group has transferred substantially all the risks and rewards of ownership of the assets.

When available-for-sale financial assets are derecognised (or impaired) the cumulative gain or loss,

including that previously recognised in reserves, is recognised in the income and expenditure account.

Mortgage commitments

The Group enters into derivative contracts to reduce the exposure to risk on mortgage commitments made

(for example, where the Group has made an irrevocable offer of a loan to a customer). Mortgage

commitments and the corresponding derivative contract are recorded at fair value with movements

recognised in the income and expenditure account.

Impairment of financial assets

An asset is impaired if the recoverable amount of the asset (ie the discounted expected future cash flows

from the asset) is less than the carrying value of the asset on the balance sheet.

Assets carried at amortised cost

At each balance sheet date the Group assesses whether there is objective evidence that any of its assets

carried at amortised cost are impaired. The Group assesses assets individually and collectively where a

group of assets has similar risk characteristics.

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Objective evidence that an asset (or group of assets) may be impaired includes observable data that loss

events, such as:

• late or missed repayments of principal or interest;

• other evidence that borrowers are experiencing financial difficulties; or

• national or local economic conditions that indicate an increased likelihood that borrowers will default,

have occurred subsequent to initial recognition and their impact on the estimated future cash flows of

the asset (or group of assets) can be reliably estimated.

The Group first assesses whether evidence of impairment exists for individual financial assets. Where the

Group concludes that there is no evidence of impairment for individually assessed assets, it includes those

assets in groups of assets with similar credit characteristics and collectively assesses these groups for

impairment.

Where the Group identifies evidence that an individual asset or group of assets is impaired, it reduces the

carrying amount of the asset on the balance sheet through the use of an impairment provision and charges

the provision to the income and expenditure account. The amount of the provision made is calculated as the

difference between the carrying value of the asset and the present value of future cash flows (excluding

future credit losses that have not been incurred), discounted at the asset’s original effective interest rate.

In estimating these future cash flows, the Group takes into account such factors as the expected proceeds

from the sale of repossessed properties, the time taken to repossess and any further payments expected

from the borrower or counterparty. When an asset is considered uncollectible, it is written off against the

impairment provision on the balance sheet. Such assets are written off after all the possible collection

procedures have been completed and the amount of loss has been determined. Any additional recoveries

from borrowers, counterparties or other third parties made in future periods are offset against the impairment

charge in the income and expenditure account, once they are virtually certain to be received.

Assets carried at fair value

The Group invests in debt instruments, including gilts, certificates of deposit and floating-rate notes, secured

against loan assets and issued by third parties. These investments, including those categorised as available

for sale, are assessed at each balance sheet date to see whether there is objective evidence of impairment

(for example, if there is evidence of significant financial difficulty of the issuer of an instrument). Changes in

value from impairment are recognised in the income and expenditure account.

If, in a subsequent period, the fair value of a debt security classified as available for sale increases and the

increase can be objectively related to an event occurring after the impairment loss was recognised in the

income and expenditure account, the impairment loss is reversed through the income and expenditure

account.

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Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is

a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis,

or to realise the asset and settle the liability simultaneously.

Sale and repurchase agreements

Securities sold subject to repurchase agreements (repos) are reclassified on the balance sheet as pledged

assets when the transferee has the right by contract or custom to sell or repledge the assets. The liability to

the transferee is also included on the balance sheet, in deposits from banks, other deposits or shares, as

appropriate. The difference between sale and repurchase price is accrued over the life of the agreements

using the EIR method.

Securities purchased under agreements to re-sell (reverse repos) are classified as loans and advances to

banks on the balance sheet, as appropriate.

Securities lent to counterparties are retained on the balance sheet.

Securities borrowed are not recognised on the balance sheet, unless they are sold to third parties, in which

case the purchase and sale are recorded with the gain or loss included in gains less losses from investment

securities in the income and expenditure account. The obligation to return them is recorded at fair value as a

trading liability.

Derivative financial instruments and hedge accounting

Derivatives

Derivatives are financial instruments such as interest rate and currency swaps used by the Group to manage

its interest rate and foreign exchange risks arising from the normal course of business. The Group also uses

equity derivatives to hedge the equity risks within its guaranteed equity bonds (GEBs).

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and

are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active

markets, or calculated using valuation techniques such as discounted-cashflow models where no active

market exists. All derivatives are carried as assets when the fair value is positive and as liabilities when the

fair value is negative.

Financial guarantee contracts

The Society is the holder of a credit-default swap with another Group company which is treated as a financial

guarantee contract. In the absence of any available market price for an identical or similar contract, the

Society uses a probability-adjusted discounted-cashflow analysis to value the contract.

Hedge accounting

Hedge accounting is the matching or elimination of risks arising from potential fluctuations in interest rates,

exchange rates and market indices, typically through the use of derivative hedging instruments.

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Portfolio-hedge accounting is applied to fixed-rate mortgages and bonds which are hedged with interest-rate

swaps and meet the hedge effectiveness criteria. Products such as GEBs are fair-valued using external

valuations with movements being taken to the income and expenditure account as they do not meet the

hedge-accounting rules. This is generally fully offset by a corresponding movement in the fair value of the

underlying retail bonds.

Derivatives are used for hedge accounting in the following ways:

a. Fair-value hedges

The Group creates fair-value hedges primarily by entering into interest-rate swaps whose changes in fair

value will largely offset changes in the fair value of matched assets or liabilities.

Changes in the fair value of derivatives that are designated as fair-value hedges are recorded in the income

and expenditure account. Changes in the fair value of the hedged asset or liability that are attributable to the

hedged risk, adjust the carrying value of the hedged item in the balance sheet and are recorded in the

income and expenditure account. If the hedge no longer meets the criteria for hedge accounting, the

cumulative adjustment to the carrying amount of a hedged item, generally loans and advances to customers,

is amortised to the income and expenditure account over the period to maturity.

b. Fair-value-hedge accounting for a portfolio hedge of interest-rate risk

As part of its risk management process the Group identifies portfolios whose interest-rate risk it wishes to

hedge. The portfolios may comprise only assets, only liabilities or both assets and liabilities. The Group

analyses each portfolio into repricing time periods based on expected repricing dates, by scheduling cash

flows into the periods in which they are expected to occur. Using this analysis, the Group decides the

amount it wishes to hedge and designates as the hedged item an amount of assets or liabilities from each

portfolio equal to this.

The Group measures monthly the change in fair value of the portfolio that is being hedged. Provided that the

hedge has been highly effective, the Group recognises the change in fair value of each hedged item in the

income and expenditure account with the cumulative movement in its value being shown on the balance

sheet as a separate item, fair value adjustments for hedged risk, either within assets or liabilities as

appropriate. If the hedge no longer meets the criteria for hedge accounting, this amount is amortised to the

income and expenditure account over the remaining average useful life of the item.

The Group also measures the fair value of each hedging instrument monthly. This value is included in

derivative financial instruments in either assets or liabilities as appropriate, with the change in value recorded

in the income and expenditure account.

Any hedge ineffectiveness is recognised in the income and expenditure account as the difference between

the change in fair value of the hedged item and the change in fair value of the hedging instrument.

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c. Cashflow hedges

The Group creates cashflow hedges by entering into derivatives to reduce the variability of future cash flows.

The effective part of any gain or loss on the derivative is recognised in equity and recycled into the income

and expenditure account in the period when the hedged cashflow affects profit. The ineffective part is

recognised in the income and expenditure account immediately.

Derivatives that do not qualify for hedge accounting

Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any such

instrument are recognised in the income and expenditure account.

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their

economic characteristics and risks are not closely related to those of the host contract, and the host contract

is not carried at fair value through the income and expenditure account. These embedded derivatives are

measured at fair value with changes in fair value recognised in the income and expenditure account.

Goodwill

The difference between the cost of acquiring a subsidiary or business and the value of the Group’s share of

the net identifiable assets (including identifiable intangible assets) of an acquired subsidiary or business at

the date of acquisition is called goodwill.

Goodwill is tested at least annually for impairment by comparing its carrying value to its recoverable amount

calculated on a value in use basis. The calculation of impairment is performed for each separately

identifiable cash-generating unit within the acquired subsidiary or business. Goodwill is shown on the

balance sheet at cost less accumulated impairment losses.

Intangible assets

Intangible assets are identifiable non-monetary assets without physical substance.

Computer software

The costs associated with the production of software are recognised as an intangible asset if the Group

considers that the software will generate benefits for more than one year and that the value of these benefits

will exceed the costs incurred. Costs of production include direct development costs, employee costs and a

proportion of relevant overheads. Such assets are amortised on a straight-line basis over their useful lives up

to a maximum of seven years.

The direct costs incurred in the acquisition and bringing-into-use of computer software licences are

amortised on the basis of the expected useful lives of the licences (three to seven years).

Other costs associated with the development and maintenance of computer software are charged to the

income and expenditure account when incurred.

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Other acquired intangible assets

Other acquired intangible assets (for example, future profits from cross-sales of products such as mortgages

and insurance to the customers acquired with the business) are recognised if they can be separately

identified and valued. Their useful lives are based on the period for which they are expected to generate

economic benefits. If there are any signs of a decrease in value, the asset will be subject to impairment

testing.


All property, plant and equipment is stated at historical cost less depreciation. Historical cost includes

expenditure that is directly attributable to the acquisition of the assets.

Depreciation is calculated using the straight-line method to depreciate assets to their residual values over

their estimated useful lives, as follows:

Freehold and long-leasehold properties

50 years

Short-leasehold properties Lease term

Major improvements to properties 4 – 7 years

Equipment 3 – 7 years

An asset that is subject to depreciation is reviewed for impairment whenever events or changes in

circumstances indicate that its recoverable amount is less than its carrying value. The recoverable amount is

the higher of the asset’s fair value (less costs to sell) and its value in use.

Gains and losses on the disposal of tangible fixed assets are determined by comparing the proceeds with

the carrying amount. These are included in the income and expenditure account.

Leases

The Group enters into leases for land and buildings and operating leases for vehicles.

Leases for land and buildings are split between leases for the land and leases for the buildings for

accounting purposes only. The leases are separately assessed as to whether they are finance or operating

leases.

Finance-lease assets are recorded at fair value with an equal liability recorded in other liabilities. Interest is

allocated to the lease payments so as to record a constant rate of charge on the outstanding liability for each

accounting period.

Operating-lease payments are charged to the income and expenditure account on a straight line basis over

the term of the lease.

The Group policy is to provide for the minimum future lease payments on buildings that it does not currently

use.

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Investment property

Investment properties are properties held for long-term rental yields and capital appreciation. In accordance

with IAS 40 (revised 2003) investment properties may be carried in the balance sheet either at fair value or

at amortised cost. The Group carries investment properties in the balance sheet at amortised cost,

represented by purchase price and costs of acquisition, borrowing and improvement in the period of

acquisition. Borrowing costs incurred from the start of the capitalisation period through to the date that the

property is first available for rental are capitalised.

Leasehold properties held for long-term rental yields are classified as investment properties and carried at

amortised cost.

Depreciation of investment properties is calculated using the straight-line method to depreciate assets to

their residual value over the lower of 50 years or the length of the leasehold, if applicable.

Financial liabilities

Financial liabilities are contractual obligations to deliver cash or some other asset to a third party. They

include:

� shares;

� deposits;

� derivatives;

� debt securities issued; and

� other borrowed funds and liabilities.

Financial liabilities are recognised initially at fair value through profit or loss. Fair value includes the issue

proceeds (the fair value of consideration received) net of issue costs incurred.

Issue costs, including premiums and discounts, commissions and other costs incurred in the issuing of fixed-

and floating-rate notes and subordinated liabilities, are amortised using the EIR method.

Financial liabilities, other than derivatives and GEBs are subsequently stated at amortised cost. Any

difference between issue proceeds net of issue costs and the redemption value is recognised in the income

and expenditure account over the period of the borrowings using the EIR method.

Certain non-derivative financial liabilities included within shares (GEBs) have been designated at fair value

upon initial recognition in the balance sheet. Changes in fair value are recognised through the income and

expenditure account. The GEBs are economically matched using equity-linked derivatives, which do not

meet the requirements for hedge accounting. Recording changes in fair value of both the derivatives and the

related liabilities through the income and expenditure account most closely reflects the economic reality of

the transactions. In so doing, this accounting treatment eliminates a measurement inconsistency that would

otherwise arise from valuing the GEBs at amortised cost and the derivatives at fair value.

29 of 120

A financial liability is extinguished when the obligation is discharged, cancelled or expires. Any difference

between the carrying amount of a financial liability extinguished and the consideration paid is recognised

through the income and expenditure account.

Subscribed capital

Interest payable on permanent interest bearing shares (PIBS) is recognised in the income and expenditure

account using the EIR method.

Provisions

Provisions for legal claims are recognised when the Group has a present legal or constructive obligation as a

result of past events, it is more likely than not that an outflow of resources will be required to settle the

obligation, and the amount can be reliably estimated.

FSCS levy

The Society is committed to contribute to the Financial Services Compensation Scheme (FSCS) to enable it

to meet compensation claims from, in particular, retail depositors of failed banks. The Society provides in full

for its obligation based on information provided by the FSCS on the expected amounts of levies.

Employee benefits

The Group operates both defined-benefit and defined-contribution pension plans.

Defined benefit

The defined-benefit plan defines the amount of pension benefit that an employee will receive on retirement,

dependent on one or more factors including age, years of service and salary.

Any plan liability is recognised in the balance sheet at the present value of the Group’s defined-benefit

obligation at the balance sheet date less the fair value of plan assets.

The defined-benefit obligation is calculated annually by independent actuaries using the projected-unit-credit

method. Under this method the present value of the defined-benefit obligation is determined by discounting

the estimated future cash outflows using interest rates of high quality sterling bonds of comparable term to

the related pension liability.

Actuarial gains and losses arising from experience adjustments (ie the effects of differences between

previous actuarial assumptions and what has actually occurred) and changes in actuarial assumptions are

charged or credited each year to reserves and shown in the statement of recognised income and

expenditure.

Where the present value of the Group’s defined-benefit obligation less the fair value of plan assets results in

a surplus, to the extent that it is not recoverable the surplus is unrecognised and is available for offset

against any future actuarial losses which may arise in the plan.

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The recoverability of the surplus is tested, in accordance with IAS 19 and IFRIC 14, by reference to future

service costs, expected investment returns on pension-plan assets and interest cost on liabilities.

Past-service costs (ie the costs of improvements to employees’ benefits) are recognised immediately in the

income and expenditure account unless the changes to the pension plan are conditional on the employees

remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are

amortised on a straight-line basis over the vesting period.

Defined contribution

Under the defined-contribution plan the Group and the employee pay fixed contributions into a separate

entity. The Group has no further payment obligations once the contributions have been paid. The

contributions are recognised as an employee benefit expense when they are due.

Cash and cash equivalents

For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less

than three months’ maturity from the date of acquisition, including cash and balances with central banks,

treasury bills and other eligible bills, amounts due from other banks and short-term liquid investments.

Segmental reporting

A business segment is a component that engages in business activities from which it may earn revenues or

incur expenses, and for whom discrete financial information is available and regularly used by the Board to

allocate resources and assess performance.

The Group’s only geographical segment is considered to be the UK.

Critical accounting estimates and judgments in applying accounting policies

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities.

Estimates and judgments are continually evaluated and are based on historical experience and other factors,

including expectations of future events that are believed to be reasonable under the circumstances.

a. Impairment losses on counterparties

In accordance with the accounting policy on pages 23 and 24, the Group has assessed

balances with counterparties for objective evidence of impairment. Based on the

evidence available of difficulties arising at certain financial institutions the Group has

reduced provisions by £3.0 million during the period (2008 : made provisions of £57.4

milion). To the extent that the net present value of estimated cash flows differs by 10%,

the provision would change by an estimated £8.3 million (2008 : £8.3 million).

b. Impairment losses on loans and advances to customers

In accordance with the accounting policy on pages 23 and 24, the methodology and

assumptions used for estimating both the amount and timing of future cash flows are

reviewed regularly to reduce any differences between loss estimates and actual loss

experience.

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At the period end, the Group carried impairment provisions of £76.4 million (2008 : £79.4

million) against loans and advances to customers. To the extent that the net present

value of estimated cash flows reduces by 10%, the provisions would change by an

estimated £24.3 million (2008 : £28.8 million).

c. Impairment losses on investment properties

The comparison of the amortised cost of investment properties with their recoverable

amount involves certain judgments on the future cash flows expected from each

property. If such cash flows were to reduce by 5%, there would be a fall in the carrying

costs of investment properties of £3.0 million (2008 : nil).

d. Fair value of financial instruments

The fair value of financial instruments is calculated using the Group’s treasury system,

applying market rates to the period end treasury balances. External valuations are used

to value derivatives which hedge retail savings accounts linked to performance of such

indices as FTSE etc.

e.. Effective interest rate

The calculation of an effective interest rate requires the Group to make assumptions

around the expected lives of mortgages and the likely levels of fees to be received. The

most critical assumption is on the level of future fees.

Were the fee assumptions to change by 10% there would be an adjustment to profit of

£1.5 million (2008 : £0.8 million).

f. FSCS levy

The Group has included an estimated provision for its share of the costs of the FSCS for

the year ended 31 March 2010 of £10.1 million, based on information supplied by the

FSCS. The interest rates used in arriving at the estimate are subject to change and take

no account of recoveries the FSCS may make in respect of banking defaults. A change

in interest rates of 0.5% would change the provision by approximately £2.0 million.

g. Corporation taxes

The Group is subject to corporation taxes in three jurisdictions. Significant estimates are

required in determining the provision for corporation taxes. There are many transactions

and calculations for which the ultimate tax determination is uncertain at the balance

sheet date. In the opinion of the directors, the judgments made are appropriate and the

level of provision is adequate to cover the likely liability.

h. Pensions

The actuarial valuation of the defined-benefit pension plan is prepared using

assumptions about the long-term return on plan assets, salary increases, inflation and

mortality rates. The assumptions are determined by senior management on the advice

of an independent actuary and are benchmarked against the assumptions used in other

similar plans. The sensitivity of results to changes in key assumptions are set out in

Note 46.

32 of 120

Notes to the consolidated financial statements


1. Interest receivable and similar income


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

on loans fully secured on residential property 450.9 1,276.7 274.0 613.9

on other loans to connected undertakings - - 146.7 522.4

on other loans secured on property 105.3 242.4 40.4 93.4

on investment securities 109.3 465.6 108.7 462.7

on other liquid assets 9.5 87.3 3.4 69.0

on other balances 0.2 20.4 0.2 17.3

675.2 2,092.4 573.4 1,778.7

net (expense)/income on financial instruments hedging

assets (131.1) 63.3 (127.1) 67.7

net interest expense on financial

instruments not in a hedging relationship (21.2) (48.5) (10.3) (50.6)

522.9 2,107.2 436.0 1,795.8

2. Interest expense and similar charges


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

on shares held by individuals 226.2 750.9 226.2 750.9

on bank and other deposits 186.1 889.9 115.7 542.1

on deposits by connected undertakings - - 49.6 127.0

on subordinated liabilities 12.0 35.5 12.0 35.5

on subscribed capital 13.1 28.9 13.1 28.9

437.4 1,705.2 416.6 1,484.4

net (income)/expense on financial instruments hedging

liabilities (35.0) 116.5 (45.3) 116.3

net interest income on financial

instruments not in a hedging relationship (1.8) (22.0) (1.8) (22.0)

400.6 1,799.7 369.5 1,578.7

On financial liabilities not at fair value through income or expense

On financial liabilities at fair value through income or expense

Included within Group interest receivable is £21.0 million (12 months ended 31 December 2008 : £29.7 million) and

within Society £0.5 million (12 months ended 31 December 2008 : £0.3 million) in respect of interest accrued on

impaired financial assets against which the Group and Society are carrying impairment provisions.

On financial assets not at fair value through income or expense

On financial assets at fair value through income or expense

33 of 120



3. Fee and commission income


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

mortgage-related fees 2.6 2.4 2.4 2.1

other fee and commission income 31.7 59.6 9.2 18.4

34.3 62.0 11.6 20.5

4. Fee and commission expense


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

other fee and commission expense 18.9 16.0 5.4 3.7

5. Income from investments

Society Society

7 months

ended

12 months

ended

31 July 31 December

2009 2008

£m £m

Dividend income from shares in subsidiaries 41.8 28.0

8.6 -

50.4 28.0

6. Gains less losses from derivative financial instruments


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

Foreign-exchange gains less losses (1.1) 0.5 - -

Fair-value hedges 30.9 30.2 31.6 20.8

Other interest-rate instruments 15.2 (5.4) 13.5 2.2

45.0 25.3 45.1 23.0

Capital distribution from disposal of shares in subsidiaries

There is no material cashflow hedging ineffectiveness in the period (12 months ended 31 December 2008 : nil).

Included within other fee and commission expense for the Group and the Society is a release of nil (12 months ended 31

December 2008 : release of £0.1 million) relating to movements in regulatory provisions.

On financial assets not at fair value through income or expense

On financial liabilities not at fair value through income or expense

34 of 120



7. Gains less losses from other financial instruments


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

Buy-back of subordinated liabilities 36.5 - 36.5 -

Buy-back of debt securities in issue 21.4 - - -

57.9 - 36.5 -

8. Other operating income


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

Rent receivable 2.7 2.2 1.0 1.6

Other 0.5 3.6 0.5 3.5

3.2 5.8 1.5 5.1

9. Administrative expenses


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

Staff costs (Note 10) 75.7 119.5 61.9 95.7

Profit on sale of property, plant and equipment (0.3) (3.6) (0.3) (3.6)

Operating lease rentals 8.9 14.0 8.8 13.9

Direct operating expenses from investment properties that

generated rental income during the period 1.1 - - -

Direct operating expenses from investment properties that

did not generate rental income during the period 0.1 0.2 - -

Other administrative expenses 37.0 79.8 29.1 63.8

122.5 209.9 99.5 169.8

The Group and Society gains less losses on the buy-back of subordinated liabilities relates to the repurchase by the

Society of its own subordinated debt.

Included in rent receivable for the Group is £1.5 million (12 months ended 31 December 2008 : £0.1 million) of rental

income relating to investment properties.

In addition to the above, merger costs of £26.9 million (12 months ended 31 December 2008 : nil) relate to the merger

with The Co-operative Financial Services which took place with effect from 1 August 2009 (Note 61).

The Group gains less losses on the buy-back of debt securities in issue relates to the Society's purchase of debt securities

issued by Leek Finance Number Seventeen plc, Leek Finance Number Eighteen plc and Leek Finance Number Nineteen

plc.

35 of 120



9. Administrative expenses (continued)

Services provided by the Group’s auditors

During the period the Group obtained the following services from its auditors:

7 months

ended

12 months

ended

31 July 31 December

2009 2008

£m £m

0.5 0.4

- 0.3

0.1 0.1

- 0.1

0.8 0.8

10. Staff costs


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

Wages and salaries 62.8 102.6 50.6 81.8

Social security costs 5.9 10.5 4.9 8.6

Pension costs (Note 46)

3.7 4.2 3.1 3.1

defined-benefit plans 3.3 2.2 3.3 2.2

75.7 119.5 61.9 95.7

The Group has a policy on the use of external auditors for non-audit work. Compliance with this was monitored by the

Group’s audit committee which ensures that external-auditor independence is maintained by approval limits for audit

and non-audit fees.

other services relating to taxation

valuation and actuarial services

all other services

Fees payable to the Society’s auditor for the audit of the Society’s accounts

Fees payable to the Society’s auditor and its associates for other services

the audit of the Society’s subsidiaries, pursuant to legislation

defined-contribution plans

36 of 120



11. Directors’ remuneration

The remuneration of the Society’s directors is detailed below:

Salary/fee

Performance-

related bonus

(payable

November

2009)

Long-term

incentive plan

(payable

November

2009) Benefits

Increase/

(decrease) in

accrued

pension Total

£000 £000 £000 £000 £000 £000

Executive directors

Neville Richardson 238 167 107 7 8 527

Tim Franklin 146 66 66 13 5 296

Phil Lee 159 72 72 9 6 318

David McCarthy 128 58 17 19 - 222

Non-executive directors

75 - - - - 75

Keith Cameron 34 - - - - 34

22 - - - - 22

34 - - - - 34

Peter Harvey 29 - - - - 29

Chris Jones 38 - - - - 38

Stephen Kingsley 24 - - - - 24

Bridget Rosewell 28 - - - - 28

Tom Sawyer 29 - - - - 29

984 363 262 48 19 1,676

7 months ended 31 July 2009

Rodney Baker-Bates (chairman)

Bill Gordon (retired 21 April 2009)

On 1 August 2009, the Society transferred its engagements to The Co-operative Financial Services. All the directors

resigned immediately before the time of the transfer. Tim Franklin, Phil Lee and Neville Richardson were appointed as

directors and Rodney Baker-Bates, Peter Harvey, Chris Jones and Stephen Kingsley as non-executive directors of The

Co-operative Financial Services following the merger.

Francis Gugen (see note in directors' report on

page 5)

37 of 120



11. Directors’ remuneration (continued)

Salary/fee

Performance-

related bonus

(payable

March 2009)

Long-term

incentive plan

2006 - 2008

(payable

March 2009) Benefits

Increase/

(decrease) in

accrued

pension Total

£000 £000 £000 £000 £000 £000

409 - 52 14 14 489

250 - 32 22 10 314

- salary 65 - - 6 2 73

155 - - - - 155

273 - 35 20 11 339

112 - - 16 - 128

54 - - - - 54

101 - - - - 101

39 - - - - 39

63 - - - - 63

39 - - - - 39

10 - - - - 10

52 - - - - 52

10 - - - - 10

48 - - - - 48

48 - - - - 48

1,728 - 119 78 37 1,962

Francis Gugen (see note in directors' report on

page 5)

Ian Adam (resigned as chairman 23 April

2008, resigned from Board 21 May 2008)

Tom Sawyer

- compensation payment following

resignation

Peter Harvey (appointed 1 October 2008)

Chris Jones

Stephen Kingsley (appointed 1 October 2008)

Bridget Rosewell

Rodney Baker-Bates (appointed chairman 23

April 2008)

Keith Cameron (appointed 1 August 2007)

Bill Gordon

Gerald Gregory (resigned 31 March 2008)

Phil Lee

David McCarthy (appointed 18 June 2008)

Non-executive directors

12 months ended 31 December 2008

Executive directors

Neville Richardson

Tim Franklin

38 of 120



11. Directors’ remuneration (continued)

-

-

-

Accrued pension

entitlement at

Increase in accrued

pension for the 7

months ended

Transfer value of

accrued benefits at

Transfer value of

accrued benefits at

Increase in transfer

value of accrued

benefits for the 7

months ended

Employees’

contributions for the

7 months ended

Individual pension

contributions via

salary sacrifice for

the 7 months ended

31 July 31 July 31 July 31 December 31 July 31 July 31 July

2009 2009 2009 2008 2009 2009 2009

£000 £000 £000 £000 £000 £000 £000

Neville

Richardson 145 8 2,685 2,506 179 - 19

Tim Franklin 67 5 1,097 954 143 - 12

Phil Lee 61 6 1,189 1,037 152 - 13

273 19 4,971 4,497 474 - 44

member satisfaction with our employees;

The long-term incentive plan, approved by members in 2006, provides a maximum opportunity of 60% of salary in

respect of a three-year performance period. The measures of performance in the plan are:

The long-term incentive plan closed on 31 July 2009, therefore the payments made relate to the performance of the

2007, 2008 and 2009 schemes.

Non-executive directors who act as chairs of sub-committees received an additional payment of £4,958 for the 7

month period to 31 July 2009 (12 months ended 31 December 2008 : £8,500).

net interest margin; and

Britannia Membership Reward.

Executive directors

The directors shown above have the option of paying Additional Voluntary Contributions. Neither the contributions

nor the resulting benefits are included in the above table.

The Society also operates a defined-contribution pension plan of which David McCarthy is a member. During the 7

month period to 31 July 2009 the Society paid contributions of £24,600 (12 months ended 31 December 2008 :

£15,000) in respect of this director.

The following information shows the value of directors’ pension benefits. The accrued pension entitlement shown

is that which would be paid annually on retirement at age 60 based on service as at 31 July 2009. The increase in

accrued pension represents the change in the annual pension to which each director is entitled as a result of

changes in pensionable earnings (excluding inflation), increases in pensionable service and investment return

during the period. The transfer value of accrued benefits represents the present capital value of future payments

from the pension plan rather than remuneration currently due to the director and cannot be meaningfully aggregated

with annual remuneration ie it represents the amount of money the plan needs in order to pay the individual his

pension benefits earned as at 31 July 2009, for the rest of their life.

The transfer values as at 31 July 2009 and 31 December 2008 have been calculated using the Scheme transfer basis

as agreed by the Trustees.

In any period the figures quoted below as increase in transfer value of accrued benefits could be an increase or

decrease on previous period's figures.

All the executive directors will receive benefits from the Society’s registered UK pension arrangements. Certain

directors, who have pension benefits exceeding the Lifetime Allowance, will also receive benefits from an

unfunded plan (employer-financed retirement benefit scheme) which does not qualify for certain tax allowances

under the Finance Act 2004. Neville Richardson has entered into an arrangement whereby he receives a lower

salary in return for an equivalent employer’s contribution to the pension plan (salary sacrifice). Tim Franklin and

Phil Lee also entered this arrangement with effect from 1 April 2008.

39 of 120



12. Staff numbers


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

Average number of people employed

Full time

head and administrative offices 1,674 1,706 1,592 1,654

branch and subsidiary undertakings’ offices 1,746 1,883 1,298 1,356

3,420 3,589 2,890 3,010

Part time

head and administrative offices 367 363 352 356

branch and subsidiary undertakings’ offices 913 941 799 810

1,280 1,304 1,151 1,166

Total employees 4,700 4,893 4,041 4,176

13. Depreciation and amortisation


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

Amortisation of intangible assets (Note 30) 8.5 16.5 7.6 15.2

Depreciation of investment properties (Note 31) 1.0 1.1 - -

Depreciation of property, plant and equipment (Note 32) 6.8 13.5 6.2 12.2

16.3 31.1 13.8 27.4

14. Britannia Membership Reward

Group and

Society

Group and

Society

7 months

ended

12 months

ended

31 July 31 December

2009 2008

£m £m

Payable to members 20.0 19.0

Amounts unclaimed from prior periods (1.1) (0.6)

18.9 18.4

The Britannia Membership Reward (BMR) is designed to reward members of the Society for the contribution they have

made to the continued success of the Society, by distributing funds which are not required for the continued growth and

stability of the Society.

The BMR scheme will continue to operate in accordance with its current rules until 31 December 2009. During this

period the amount of any payment under the BMR will be calculated on a consistent basis by assessing the performance

of the former Britannia business as operating within The Co-operative Bank Group. The final BMR payment is subject

to approval by The Co-operative Financial Services Board in early 2010.

The number of people employed by the Group at 31 July 2009 was 4,654 (31 December 2008 : 4,764).

40 of 120



15. Taxation


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

Current tax

UK corporation tax at 28% (31 December 2008 :

28.5%)

corporation tax – adjustment in respect of prior

periods

Total current tax 16.6 (0.1) 6.9 (13.1)

Deferred tax

current period (5.3) 0.4 6.7 4.4

adjustment in respect of prior periods (4.7) (0.1) (1.3) 1.2

6.6 0.2 12.3 (7.5)

UK corporation tax has been calculated at the applicable prevailing rate.


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

Profit on ordinary activities before tax 24.8 5.4 62.4 2.4

Profit before tax multiplied by standard rate of tax 6.9 1.5 17.5 0.7

Effects of

dividends from UK subsidiaries - - - (6.2)

losses not recognised 0.7 - - -

expenses not deductible for tax purposes 0.4 1.2 0.3 0.7

profits taxed at lower rates 0.8 (0.9) (4.2) -

adjustment to tax charge in respect of prior periods (2.2) (2.4) (1.3) (2.6)

tax on joint ventures not included in tax charge - (0.2) - -

change in rate - 1.0 - (0.1)

Tax charge/(credit) for period 6.6 0.2 12.3 (7.5)

2.2 6.9 (9.3)13.5

Further information about deferred tax is presented in Note 33. The tax on the Group’s profit before tax differs from the

theoretical amount that would arise using the basic tax rate of the parent as follows:

3.1 - (2.3) (3.8)

41 of 120



16. Segmental information

Member

Business BCIG

Intercompany

items Total

£m £m £m £m


Interest margin 71.2 51.1 - 122.3

Gains less losses from derivative financial instruments 22.5 22.5 - 45.0

Gains less losses from other financial instruments 29.0 28.9 - 57.9

Other income 15.9 8.9 - 24.8

Total income 138.6 111.4 - 250.0

Management expenses (109.9) (28.9) - (138.8)

Loan losses (0.8) (44.5) - (45.3)

Profit before merger costs, impairment losses on

counterparties and provision for additional

compensation scheme levies 27.9 38.0 - 65.9

Merger costs (26.9) - - (26.9)

Impairment losses on counterparties 3.0 - - 3.0

Provision for additional compensation scheme levies 1.8 - - 1.8

Profit before Britannia Membership Reward and tax

5.8 38.0 - 43.8

Share of post-tax profits from joint ventures (0.1) - - (0.1)


paid to Society 18.9 (18.9) - -

paid to members (18.9) - - (18.9)

Profit before tax 5.7 19.1 - 24.8

Taxation (1.5) (5.1) - (6.6)

Profit after tax 4.2 14.0 - 18.2

Segment assets

Mortgages 10,716.4 13,036.5 - 23,752.9

Total assets 27,251.3 22,660.8 (15,920.3) 33,991.8

Segment liabilities

Retail funds 18,160.0 - - 18,160.0

Total liabilities 26,595.2 22,198.8 (15,920.3) 32,873.7

Other segment items

Depreciation 6.2 1.6 - 7.8

Amortisation 7.6 0.9 - 8.5

The Group reports to the Board through two business segments, Member Business and Britannia Capital Investment

Group (BCIG). The Member Business is a traditional building society focusing on savings, mortgages and other

financial services to members. BCIG offers financial services to corporate clients and individuals who are not members

of the Society. The segmental information has been prepared in accordance with IFRSs.

Transactions between the business segments are on normal commercial terms. Internal charges and transfer pricing

adjustments have been reflected in the performance of each segment. Revenue has been attributed to the business

segment in which it is generated. The Member Business raises retail funds externally to fund BCIG. Funding costs have

been calculated using a funds-transfer-pricing methodology which reflects the nature of the interest received or paid.

42 of 120



16. Segmental information (continued)


Geographical analysis United

Kingdom

All other

countries Total

£m £m £m

External revenue:

Secured mortgage products 536.7 2.9 539.6

Treasury 78.8 - 78.8

Insurance and Life commissions 10.5 - 10.5

Investment income 12.1 - 12.1

Mortgage fee income 11.3 - 11.3

Rental income 2.7 - 2.7

Sundry income 14.5 - 14.5

Non current assets:

Loans and advances to customers 23,609.1 143.8 23,752.9

Goodwill 194.8 - 194.8

Intangible assets 36.4 - 36.4

Investment properties 131.1 - 131.1

Property, plant and equipment 72.6 - 72.6

12 months ended 31 December 2008 Member

Business BCIG

Intercompany

items Total

£m £m £m £m

Interest margin 198.1 109.4 - 307.5

Hedge ineffectiveness 1.7 1.6 - 3.3

Gains less losses from derivative financial instruments 25.3 - - 25.3

Other income 41.9 21.2 - 63.1

Total income 267.0 132.2 - 399.2

Management expenses (193.7) (47.3) - (241.0)

Loan losses (1.0) (56.8) - (57.8)

Profit before impairment losses on counterparties and

provision for additional compensation scheme levies

72.3 28.1 - 100.4

Impairment losses on counterparties (57.4) - - (57.4)

Provision for additional compensation scheme levies (19.8) - - (19.8)

(Loss)/profit before Britannia Membership Reward

and tax (4.9) 28.1 - 23.2

Share of post-tax profits from joint ventures 0.6 - - 0.6


paid to Society 18.4 (18.4) - -

paid to members (18.4) - - (18.4)

(Loss)/profit before tax (4.3) 9.7 - 5.4

Taxation 0.2 (0.4) - (0.2)

(Loss)/profit after tax (4.1) 9.3 - 5.2

43 of 120



16. Segmental information (continued)


Member

Business BCIG

Intercompany

items Total

£m £m £m £m

Segment assets

Mortgages 10,898.9 13,349.7 - 24,248.6

Total assets 26,702.6 20,898.2 (10,384.1) 37,216.7

Segment liabilities

Retail funds 18,647.7 - - 18,647.7

Total liabilities 26,031.7 20,496.6 (10,384.1) 36,144.2

Other segment items

Depreciation 11.9 2.7 - 14.6

Amortisation 15.0 1.5 - 16.5

Geographical analysis United

Kingdom

All other

countries Total

£m £m £m

External revenue:

Secured mortgage products 2,074.2 7.7 2,081.9

Treasury 34.2 - 34.2

Insurance and Life commissions 19.5 - 19.5

Investment income 22.9 - 22.9

Mortgage fee income 3.5 - 3.5

Rental income 2.2 - 2.2

Sundry income 10.8 - 10.8

Non current assets:

Loans and advances to customers 24,088.7 159.9 24,248.6

Goodwill 194.8 - 194.8

Intangible assets 39.7 - 39.7

Investment properties 105.5 - 105.5

Property, plant and equipment 78.2 - 78.2

During the 7 month period to 31 July 2009 and the 12 month period to 31 December 2008 the Group had no reliance on

any single external customer for more than 10% of its revenue.

44 of 120



17. Cash and balances with the Bank of England



2009 2008 2009 2008

£m £m £m £m

Cash in hand 8.3 0.2 8.3 0.2

Balances with the Bank of England other than mandatory

reserve deposits 560.8 252.8 560.8 252.8

Included in cash and cash equivalents (Note 59) 569.1 253.0 569.1 253.0

Mandatory reserve deposits with the Bank of England 22.7 22.0 22.7 22.0

591.8 275.0 591.8 275.0

18. Loans and advances to banks



2009 2008 2009 2008

£m £m £m £m

Placements with other banks included in cash equivalents

(Note 59) 293.8 798.2 287.4 785.5

Loans and advances to other banks 683.3 992.7 43.7 505.2

977.1 1,790.9 331.1 1,290.7

Less allowance for losses on loans and advances to banks

(Note 24) (4.6) (1.1) (4.6) (1.1)

972.5 1,789.8 326.5 1,289.6

Loans and advances to banks have remaining maturities as follows:



2009 2008 2009 2008

£m £m £m £m

Accrued interest 0.6 1.5 0.3 1.2

In not more than three months 932.8 1,284.2 287.1 784.3

In more than three months but not more than one year 43.7 505.2 43.7 505.2

977.1 1,790.9 331.1 1,290.7

Less allowance for losses on loans and advances to banks

(Note 24) (4.6) (1.1) (4.6) (1.1)

972.5 1,789.8 326.5 1,289.6

Mandatory reserve deposits are not available for use in the Group’s day-to-day operations. Cash in hand and mandatory

reserve deposits with the Bank of England are non-interest bearing.

45 of 120



19. Loans and advances to customers



2009 2008 2009 2008

£m £m £m £m

Loans fully secured on residential property 21,593.1 22,056.6 11,434.2 11,623.6

Other loans

loans fully secured on land 2,148.3 2,179.5 662.9 676.5

other loans 87.9 91.9 59.9 60.4

Gross loans and advances 23,829.3 24,328.0 12,157.0 12,360.5

Less allowance for losses on loans and advances to

customers (Note 23) (76.4) (79.4) (6.0) (11.9)

23,752.9 24,248.6 12,151.0 12,348.6

Maturity analysis



2009 2008 2009 2008

£m £m £m £m

Repayable on demand 98.4 83.6 19.4 19.7

Other loans and advances by residual maturity repayable

in not more than three months 271.1 268.1 180.6 185.8

in more than three months but not more than one year 731.3 770.9 541.4 580.4

in more than one year but not more than five years 5,108.7 5,134.3 3,271.1 3,237.3

in more than five years 17,623.6 18,075.8 8,131.4 8,316.3

23,833.1 24,332.7 12,143.9 12,339.5

Effective interest rate adjustment (3.8) (4.7) 13.1 21.0

Less allowance for losses on loans and advances to

customers (Note 23) (76.4) (79.4) (6.0) (11.9)

23,752.9 24,248.6 12,151.0 12,348.6


Fair-value adjustments to loans and advances to customers attributable to portfolio-hedged risk in the Group are £370.2

million (31 December 2008 : £538.8 million) and in the Society are £284.6 million (31 December 2008 : £408.8

million).

Other loans fully secured on land for Group and Society include £56.0 million (31 December 2008 : £54.5 million) of

loans which are fully secured on residential property and which were made to corporate bodies, such as Housing

Associations, prior to 1 October 1998, the date the Society adopted the powers of the Building Societies Act 1997. The

classification of these assets is not consistent with the treatment of similar loans made after 1 October 1998, which are

included in ‘loans fully secured on residential property’ but is necessary to comply with the requirements of the

Building Societies Act 1997.

It is probable that loans and advances to customers will be repaid before their contractual maturity date. The remaining

contractual maturity of loans and advances to customers from the date of the balance sheet is as follows:

The Group has entered into interest-rate swaps that protect it from changes in interest rates on the floating-rate liabilities

that fund its portfolio of fixed-rate mortgages. Changes in the fair values of these swaps are offset by changes in the fair

values of the fixed-rate mortgages. The changes in fair value of fixed-rate mortgages are disclosed on the balance sheet

as fair-value adjustments for hedged risk immediately below the loans and advances to customers.

46 of 120



20. Maximum exposure to credit risk (by class), collateral held and the credit quality of assets

Group

Category

(as defined by IAS 39)

31 July 31 December

2009 2008

£m £m

Derivative financial instruments 1,086.6 1,583.7

Loans and receivables Loans and advances to banks 981.7 1,811.1

Loans and advances to customers Member Business 10,716.4 10,897.9

Commercial 3,686.2 3,720.9

9,350.3 9,629.8

Investment securities –

loans and receivables Listed 5,178.0 6,109.8

Unlisted 28.5 23.8

29,941.1 32,193.3


available-for-sale Listed 1,079.2 303.2

Unlisted 302.4 1,730.2

32,409.3 35,810.4

1,381.6 2,033.4

Total loans and receivables

23,752.9 24,248.6

Total loans and advances to

customers

Available-for-sale financial

assets

Total available-for-sale

financial assets

The classes of financial instrument to which the Group is most exposed are loans and advances to customers, loans and

advances to banks, investment securities – available-for-sale and derivative financial instruments.

The table below represents a worst-case scenario of credit-risk exposure of the Group at 31 July 2009 and 31 December

2008, without taking into account any collateral held or other credit enhancements attached. These exposures are based

on net carrying amounts as reported in the balance sheet. Management is confident in its ability to maintain a minimal

group credit-risk exposure resulting from both its loan and advances portfolio and liquid assets portfolio.

Class

(as determined by the Group)

Maximum exposure to

credit risk before collateral

held

Financial assets at fair value

through income or expense

BCIG residential

mortgages

47 of 120



20. Maximum exposure to credit risk (by class), collateral held and the credit quality of assets (continued)

Society

Category

(as defined by IAS 39)

31 July 31 December

2009 2008

£m £m

733.1 904.6

Loans and receivables 335.7 1,310.9

10,716.4 10,908.2

1,434.6 1,440.4

5,256.1 6,109.8

28.5 23.8

17,771.3 19,793.1

1,079.2 251.2

302.4 1,728.4

19,886.0 22,677.3

Weighted

average of

new lending

during period

Weighted

average of

whole book

Weighted

average of

new lending

during period

31 July 31 December 31 December

2009 2008 2008

% % %

Member Business 53.5 36.8 55.4

BCIG residential mortgages 60.0 77.8 78.1

38.4

79.9

2009

%

Weighted

average of

whole book

Listed

Unlisted




Total loans and receivables

Total loans and advances to

customers

31 July

Member Business

Commercial

Listed

Unlisted

available-for-sale

financial assets


Total available-for-sale

12,151.0 12,348.6

Loans and advances to banks include undrawn irrevocable commitments amounting to £9.2 million (31 December 2008

: £21.3 million). These are treasury standby facilities offered by the Society to banks and building societies which can

be drawn down at their request. The facilities are part of the overall credit exposure the Group approves for each

treasury borrower.

The Group employs a range of policies and practices to mitigate credit risk . All loans and advances to customers are

secured by mortgage on the underlying land and property. It should be noted that the overall value of collateral will

normally be in excess of the value of the loans, due to the Group’s lending policy.

The credit quality of the residential loans and advances to customers is demonstrated in the table below, which shows

the weighted-average loan-to-value (LTV) of customer lending as at 31 July 2009 and 31 December 2008.

1,381.6 1,979.6

Available-for-sale financial

assets

loans and receivables

Financial assets at fair value

through income or expense

Maximum exposure to

credit risk before collateral

held

Class



48 of 120



20. Maximum exposure to credit risk (by class), collateral held and the credit quality of assets (continued)

The principal collateral types are:

Category (as defined by IAS 39) Type of collateral

Mortgages over residential properties and

land

Charges over financial instruments such as

debt securities

Mortgages over residential properties

Investment securities

– loans and

receivables

Listed Unsecured apart from MBS and ABS - see

comment above

Unlisted Unsecured

Unlisted Unsecured

The weighted-average LTV of the commercial loans and advances to customers portfolio at 31 July 2009 was 81.2%

(31 December 2008 : 75.6%). There were no new loans during the 7 month period to 31 July 2009 (12 months ended 31

December 2008 : 18), due to the current economic climate and in line with the Group's appetite to risk. The average

LTV of new commercial lending during the 12 months ended 31 December 2008 based on valuations at the time of

lending was 76.9%. As at 31 December 2008 the weighted average LTV of the new lending in 2008 was 102.8%,

reflecting the significant fall in commercial property values in the last two months of the period.

Available-for-sale financial assets Investment securities

– available-for-sale

Listed Unsecured apart from MBS and ABS - see

comment above

Loans and receivables Loans and advances to banks See comment above

Loans and advances

to customers

Mortgages over residential propertiesMember

Business

Commercial

Charges over commercial properties such

as offices and warehouses

BCIG

residential

mortgages

See comment above

The percentages are calculated using valuations adjusted by reference to movements in the house-price index.

The Group operates guidelines on the acceptability of specific classes of collateral or credit risk mitigation. Collateral

held as security for treasury assets is determined by the nature of the instrument. Loans and debt securities are generally

unsecured with the exception of asset-backed securities (ABS) and mortgage-backed securities (MBS) which are

secured by pools of financial assets. The International Swaps and Derivatives Association (ISDA) Master Agreement is

used by the Group for documenting derivative activity. A Credit Support Annex (CSA) is used in conjunction with the

ISDA Master Agreement if requested by the treasury counterparty. Under a CSA, collateral is passed between parties to

mitigate the market contingent counterparty risk inherent in the outstanding positions.

Netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as transactions are

usually settled on a gross basis. The Group’s legal documentation for derivative transactions grants legal rights of set-

off for those transactions. Accordingly, the credit risk associated with such contracts is reduced to the extent that

negative mark-to-market values on derivatives will offset positive mark-to-market values in the calculation of credit

risk, subject to an absolute exposure of zero.

Class (as determined by the Group)

Financial assets at fair value Derivative financial instruments

49 of 120



21. Loans and advances neither past due nor impaired

Class (as determined

by the Group) Risk grade


2009 2008 2009 2008

% % % %

Lower 87.4 79.2 0.02 0.03

Medium 7.1 17.2 0.05 0.07

Higher 5.5 3.6 0.13 0.13

Lower 97.9 98.0 0.09 0.09

Medium 1.6 1.6 1.44 1.42

Higher 0.5 0.4 4.52 4.40

Lower 90.0 91.0

Medium 8.2 7.6

Higher 1.8 1.4

Lower 21.0 30.1 0.46 0.47

Medium 45.1 41.9 1.47 1.57

Higher 33.9 28.0 8.61 6.66

Loans and advances to

banks

BCIG residential

mortgages

Loans and advances to

customers Member Business

Commercial

The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by

reference to the probability of default, ie the likelihood of accounts reaching six months in arrears or entering litigation

once they have entered arrears.

For management purposes, the Group applies an internal-ratings-based (IRB) approach, to the majority of its assets, as

laid out and approved by the Financial Services Authority (FSA). The IRB percentages represent the risk-weightings

applied to each asset class. With the exception of commercial where ratings are prescribed by the FSA, these

percentages are based on the probability of default and loss given default as measured by the outputs of the Group’s

rating system. These therefore give an indication of the credit quality of the Group’s loan portfolio.

The probability of default percentages disclosed in the table below, derived from the Group’s rating system,

demonstrate the quality of the Group’s asset portfolio. All loans are graded according to whether they are lower,

medium or higher risk.

Risk grade category as a

percentage of total balance

neither past due nor

impaired Probability of default

50 of 120



22. Loans and advances either impaired, or past due but not impaired


Group

31 July 2009 £m £m £m £m

Loans neither past due nor impaired 10,604.2 3,317.1 7,334.4 21,255.7

Past due but not impaired

past due up to 3 months 71.3 162.1 649.9 883.3

past due 3 to 6 months 13.7 33.6 64.7 112.0


past due over 12 months 3.7 10.3 123.0 137.0

96.5 330.6 901.4 1,328.5

Impaired

past due 3 to 6 months 7.5 - 397.8 405.3


past due over 12 months 1.8 - 241.6 243.4

13.8 31.8 1,046.0 1,091.6

Possessions 3.1 34.1 116.3 153.5

Total loans and advances (Note 19) 10,717.6 3,713.6 9,398.1 23,829.3

Fair value of collateral

past due but not impaired 247.3 365.2 1,065.7 1,678.2

impaired 15.2 27.2 1,028.5 1,070.9

possessions 4.7 28.4 109.4 142.5

The tables below analyse loans and advances to customers and other financial instruments as either current, past due,

impaired or in possession. The outstanding balance is classified as past due if any part of that balance has passed the

due date for its payment.

Once a loan or an advance is past due by more than three months it is assessed to determine whether or not it is

impaired. The whole balance is considered to be impaired if any part of that balance is assessed as being irrecoverable.

Member

Business Commercial

BCIG

residential

mortgages Total

51 of 120



22. Loans and advances either impaired, or past due but not impaired (continued)

Group

31 December 2008 £m £m £m £m

Loans neither past due nor impaired 10,795.5 3,616.6 7,318.4 21,730.5


past due up to 3 months 64.6 83.2 1,234.1 1,381.9


past due 6 to 12 months 8.6 - 98.4 107.0


92.4 93.2 1,536.7 1,722.3

Impaired




8.8 25.4 688.2 722.4

Possessions 2.2 10.5 140.1 152.8

Total loans and advances (Note 19) 10,898.9 3,745.7 9,683.4 24,328.0


past due but not impaired 244.5 129.7 1,819.3 2,193.5

impaired 10.1 25.9 685.5 721.5

possessions 2.5 11.1 136.8 150.4

Society

Commercial Total

31 July 2009 £m £m £m

Loans neither past due nor impaired 10,604.2 1,388.7 11,992.9


past due up to 3 months 71.3 3.2 74.5

past due 3 to 6 months 13.7 - 13.7

past due 6 to 12 months 7.8 34.2 42.0

past due over 12 months 3.7 - 3.7

96.5 37.4 133.9

Impaired




13.8 13.3 27.1

Possessions 3.1 - 3.1

Total loans and advances (Note 19) 10,717.6 1,439.4 12,157.0


past due but not impaired 247.3 33.8 281.1

impaired 15.2 13.3 28.5

possessions 4.7 - 4.7

Total

Member

Business

Member

Business Commercial

BCIG

residential

mortgages

52 of 120




Society

Total

31 December 2008 £m £m £m







92.4 35.2 127.6

Impaired




8.8 - 8.8

Possessions 2.2 - 2.2

Total loans and advances (Note 19) 10,898.9 1,461.6 12,360.5


past due but not impaired 244.5 61.4 305.9

impaired 10.1 - 10.1

possessions 2.5 - 2.5

- a forced-sale discount on the repossessed properties;

- expected costs to be incurred on sale;

- probability of default; and

- repossession propensity (the likelihood of repossession given default).

The nature of the collateral held as security is explained in Note 20.

During the 7 month period to 31 July 2009 183 loans to customers in Member Business (12 months ended 31

December 2008: 25) and 808 BCIG residential mortgages (12 months ended 31 December 2008 : 115) were

renegotiated. The balance on these loans as at 31 July 2009 was £12.0 million (31 December 2008 : £0.8 million) and

£100.3 million (31 December 2008 : £15.1 million) respectively. These are classified as loans neither past due nor

impaired, for so long as the mortgagors comply with the terms of their renegotiated contracts. During the 7 month

period to 31 July 2009 one loan within Commercial (12 month period to 31 December 2008 : nil) was renegotiated. The

balance on this loan as at 31 July 2009 was £15.1 million (31 December 2008 : nil).

It is not meaningful to calculate the provision for each class by simply deducting the fair value of the collateral on the

impaired loans from the value of the impaired loans themselves, due to a number of adjustments being applied. These

include:

Commercial

Member

Business

53 of 120




Other financial instruments

Group

31 July 2009 £m £m £m

Loans neither past due nor impaired 951.2 5,176.0 6,127.2

Impaired

past due up to 3 months - 9.2 9.2

past due 3 to 6 months - - -


25.9 80.3 106.2

Total 977.1 5,256.3 6,233.4

31 December 2008


Impaired


past due 3 to 6 months - 50.8 50.8


25.9 81.4 107.3

Total 1,789.8 6,190.2 7,980.0

Society

31 July 2009

£m £m £m

Loans neither past due nor impaired 305.2 5,254.1 5,559.3

Impaired

past due up to 3 months - 9.2 9.2



25.9 80.3 106.2

Total 331.1 5,334.4 5,665.5

31 December 2008


Impaired


past due 3 to 6 months - 50.8 50.8


25.9 81.4 107.3

Total 1,289.6 6,190.2 7,479.8

Once a financial instrument, other than loans and advances to customers, is past due it is assumed to be impaired. The

whole balance is considered to be impaired if any part of that balance is assessed as being irrecoverable. All assets are

unsecured.

Loans and

advances to

banks

Investment

securities -

loans and

receivables Total

Loans and

advances to

banks

Investment

securities -

loans and

receivables Total

54 of 120



23. Impairment losses on loans and advances to customers

£m £m £m £m

At 1 January 2009 1.0 24.8 53.6 79.4

Charge for the period 0.8 7.8 37.9 46.5

Amounts utilised (0.6) (5.2) (43.7) (49.5)

At 31 July 2009 1.2 27.4 47.8 76.4

At 1 January 2008 0.9 7.4 40.7 49.0


Amounts utilised (1.4) (1.3) (43.7) (46.4)

At 31 December 2008 1.0 24.8 53.6 79.4

Society

Member

Business Commercial Total

£m £m £m

At 1 January 2009 0.3 11.6 11.9

Charge/(release) for the period 1.5 (6.7) (5.2)

Amounts utilised (0.7) - (0.7)

At 31 July 2009 1.1 4.9 6.0

At 1 January 2008 0.9 2.0 2.9

Charge for the period 0.8 11.2 12.0

Amounts utilised (1.4) (1.6) (3.0)

At 31 December 2008 0.3 11.6 11.9

Group

Loans fully

secured on

residential

property

Loans fully

secured on

land Total

£m £m £m

At 1 January 2009 66.2 13.2 79.4



At 31 July 2009 62.9 13.5 76.4

At 1 January 2008 45.6 3.4 49.0



At 31 December 2008 66.2 13.2 79.4

Group Commercial

BCIG

residential

mortgages Total

Member

Business

55 of 120



23. Impairment losses on loans and advances to customers (continued)

Society

Loans fully

secured on

residential

property

Loans fully

secured on

land Total

£m £m £m

At 1 January 2009 0.3 11.6 11.9



At 31 July 2009 1.1 4.9 6.0

At 1 January 2008 0.9 2.0 2.9


Amounts utilised (1.4) (1.6) (3.0)

At 31 December 2008 0.3 11.6 11.9

24. Impairment losses on counterparties

Group and Society

Loans and

advances to

banks

Investment

securities -

loans and

receivables Total

£m £m £m

At 1 January 2009 1.1 56.3 57.4


Amounts utilised - - -

At 31 July 2009 4.6 49.8 54.4

At 1 January 2008 - - -

Charge/(release) for the period 1.1 56.3 57.4

Amounts utilised - - -

At 31 December 2008 1.1 56.3 57.4

Impairment losses on counterparties represent provisions to cover for possible losses arising from the Group's exposure

to the Lehman and Kaupthing groups.

Included within the above for the Group is £1.9 million (31 December 2008 : £13.7 million) and for the Society is £0.2

million (31 December 2008 : £10.2 million) which is deemed to be collectively impaired.

The net impairment charge/release in the Group and Society income statements for the 7 month period to 31 July 2009

are a charge of £45.3 million (12 months ended 31 December 2008 : charge of £57.8 million) and a release of £5.2

million (12 months ended 31 December 2008 : charge of £9.7 million) respectively. These include amounts recovered

during the 7 month period by the Group of £1.2 million (12 months ended 31 December 2008 : £19.0 million) and by

the Society of nil (12 months ended 31 December 2008 : £2.3 million) against amounts previously written off. The

recoveries have been made from the mortgagors and from other parties involved in the origination or acquisition of the

mortgages.

Portfolios of mortgages that are acquired by the Group from third parties are purchased at a price that includes a

discount based on all of the future losses that those mortgages are expected to incur. At 31 July 2009 these additional

balance sheet loss provisions amounted to £35.2 million (31 December 2008 : £48.7 million) and are included within

the carrying value of gross loans and advances to customers in Note 19.

56 of 120



25. Investment securities - loans and receivables



2009 2008 2009 2008

£m £m £m £m


listed 5,178.0 6,109.8 5,256.1 6,109.8

unlisted 28.5 23.8 28.5 23.8

5,206.5 6,133.6 5,284.6 6,133.6

Group Society

£m £m

6,048.2 6,048.2

Net exchange rate movements (288.6) (288.6)

1,083.3 1,083.3

(1,728.3) (1,650.2)

6.5 6.5

At 31 July 2009 5,121.1 5,199.2

The Group expects that the carrying amount of investment securities - loans and receivables is fully recoverable.

Additions

At 1 January 2009

Redemptions and capital repayments

In the periods from the acquisition of each of the investment securities until the date of reclassification, movements in

their fair values were recognised in the available-for-sale reserve. After reclassification, no further fair value movements

are recognised. The fair value movements that have been recognised through the available-for-sale reserve are amortised

back to the income and expenditure account using an individual EIR calculation for each investment security. The range

of EIRs calculated varies between -0.09% and 3.9%.

Release of impairment losses on counterparties (Note 24)

The movement in investment securities - loans and receivables excluding interest amounts may be summarised as

follows:

There were no realised gains less losses from investment securities - loans and receivables during the period (31

December 2008 : nil). During the 12 month period to 31 December 2008, realised gains less losses from investment

securities - available-for-sale include an impairment loss of £0.7 million on assets that were subsequently reclassified to

investment securities - loans and receivables. No assets were reclassified during the 7 month period to 31 July 2009.

During the period to 31 December 2008, the Group made an election under the amendment to IAS 39 to reclassify the

majority of floating-rate notes and ABS assets with a carrying value of £5,729.4 million from investment securities -

available-for-sale, measured at fair value, to investment securities - loans and receivables, measured at amortised cost.

The Group purchased these assets with the intention of holding them until they mature, whilst retaining the option of

selling them earlier if preferred, and so classified them as available-for-sale carrying them at fair value (Note 26). The

Group considered that fair value was no longer appropriate in an inactive market. These assets are now carried at

amortised cost, being their fair value at the effective date of reclassification.

During 2008, in the period up to the effective date of reclassification on 1 July 2008, the fair value of these assets had

been reduced by £101.9 million which was recognised through the available-for-sale reserve. After reclassification these

assets are carried at amortised cost. If the reclassification had not been made and these assets were still being carried at

fair value, their fair value at 31 July 2009 would have been approximately £4.8 billion (31 December 2008 : £5.5

billion).

57 of 120



25. Investment securities - loans and receivables (continued)

Investment securities - loans and receivables have remaining maturities as follows:



2009 2008 2009 2008

£m £m £m £m


In not more than three months 140.7 224.1 140.7 224.1

In more than three months but not more than one year 630.8 576.8 630.8 576.8

In more than one year 4,319.1 5,222.5 4,397.2 5,222.5

Impaired assets 30.5 24.8 30.5 24.8

5,206.5 6,133.6 5,284.6 6,133.6

26. Investment securities - available-for-sale



2009 2008 2009 2008

£m £m £m £m


listed 1,079.2 303.2 1,079.2 251.2

unlisted 302.4 1,730.2 302.4 1,728.4

1,381.6 2,033.4 1,381.6 1,979.6

Gains less losses from investment securities - available-for-sale comprise:



2009 2008 2009 2008

£m £m £m £m

Impairment provision on investment securities - (2.5) - (2.5)

Realised gains less losses 6.2 17.1 5.0 17.4

Gains less losses from investment securities 6.2 14.6 5.0 14.9

Group Society

£m £m

At 1 January 2009 2,022.3 1,969.4

Additions 5,979.8 5,950.1

Disposals (sale and redemption) (6,617.2) (6,534.8)

Net movements from changes in fair value (Note 49) (16.6) (16.4)

At 31 July 2009 1,368.3 1,368.3

The movement in investment securities - available-for-sale excluding interest amounts may be summarised as follows:

During the period the Group has not reclassified any financial assets measured at amortised cost (31 December 2008 :

nil).

58 of 120



26. Investment securities - available-for-sale (continued)

Investment securities - available-for-sale have remaining maturities as follows:



2009 2008 2009 2008

£m £m £m £m

13.3 11.1 13.3 10.2

301.9 1,727.0 301.9 1,718.2

52.2 13.6 52.2 -

1,014.2 281.7 1,014.2 251.2

1,381.6 2,033.4 1,381.6 1,979.6

27. Derivative financial instruments

31 July 31 December 31 July 31 December 31 July 31 December

2009 2008 2009 2008 2009 2008

£m £m £m £m £m £m

designated as fair-value

hedges 17,150.9 25,002.6 269.4 177.2 (508.2) (569.7)

designated as cashflow

hedges 4,384.4 3,463.8 162.3 68.8 (188.6) (102.3)

at fair value through

income or expense 5,061.7 2,373.9 33.5 44.6 (45.3) (41.5)


hedges 3,839.9 4,608.6 621.4 1,293.1 21.0 (2.2)

30,436.9 35,448.9 1,086.6 1,583.7 (721.1) (715.7)

Society


hedges 14,711.2 18,243.7 269.2 191.3 (427.0) (448.4)

designated as cashflow

hedges 4,315.2 3,254.7 162.6 68.8 (185.0) (99.2)


income or expense 1,546.4 1,770.3 22.5 44.6 (22.6) (30.7)


hedges 1,984.4 1,892.9 265.0 599.9 21.0 (2.2)


income or expense 79.4 87.8 13.8 - - -

22,636.6 25,249.4 733.1 904.6 (613.6) (580.5)

Credit default swap

Interest-rate swaps

Cross-currency interest-

Total derivative assets/

(liabilities) held for

matching

Accrued interest

In not more than three months

In more than three months but not more than one year

In more than one year

Cross-currency interest-

Total derivative assets/

(liabilities) held for

matching

Contract/nominal amount

A description of the derivative financial instruments used by the Group for hedging purposes is given in Note 55. The

fair values of derivative instruments held for matching are set out below:

Group

Interest-rate swaps

Fair-value assets Fair-value liabilities

59 of 120



28. Investments

Investments in equity shares of subsidiary undertakings are financial assets.

31 July 31 December

2009 2008

£m £m

Society

Shares in subsidiary and associated undertakings 70.1 65.2

Subsidiary undertakings

Britannia Treasury Services Limited

Britannia Development and Management Company

Britannia Asset Management Limited

Illius Properties Limited

Mortgage Agency Services Number One Limited

Mortgage Agency Services Number Two Limited

Mortgage Agency Services Number Three Limited

Mortgage Agency Services Number Four Limited

Mortgage Agency Services Number Five Limited

Mortgage Agency Services Number Six Limited

Mortgage Agency Services Number Seven Limited

Western Mortgage Services Limited

Platform Group Holdings Limited

Platform Consumer Services Limited

Platform Funding Limited

Platform Funding No. 2 Limited



Platform Home Loans Limited

Platform Consumer Services Limited is the only direct subsidiary of Platform Group Holdings Limited.

Britannia Covered Bonds LLP Mortgage acquisition and guarantor of covered bonds

Finance company

Mortgage lending

Mortgage origination

Finance company

Finance company

Holding company

Property investment

Property investment

Mortgage lending

Holding company

Mortgage lending

Bank account custodian

During the 7 month period to 31 July 2009, the Society's investment in Illius Properties Limited was increased by £10.0

million.

Holding company

Mortgage lending

Mortgage lending

Mortgage lending

During the 7 month period to 31 July 2009, the Society obtained an interest in the following principal entity, which

gives rise to the risks and rewards that are in substance no different than if it were a subsidiary undertaking. As a

consequence this entity is consolidated in the Group accounts. The undertaking is registered in England, operating in the

United Kingdom and trading in the business indicated:

The Society has a direct interest in the ordinary share capital of the following principal subsidiary undertakings trading

in the businesses indicated. All subsidiary undertakings are included in the consolidation.

Mortgage origination and servicing

Principal subsidiary undertakings which are wholly owned, registered in England and operating in the United Kingdom:

Britannia Treasury Services Limited has the following wholly owned subsidiary undertakings, registered in England,

operating in the United Kingdom and trading in the businesses indicated:

Platform Group Holdings Limited has the following wholly owned subsidiary undertakings, registered in England,

operating in the United Kingdom and trading in the businesses indicated:

Mortgage and syndicated lending

Mortgage book administration

60 of 120



28. Investments (continued)

Registered in the Isle of Man and operating overseas:

Britannia International Limited

Registered in Guernsey and operating overseas:

Britsafe Insurance Services (Guernsey) Limited

Britannia Life Direct Limited

Britannia New Homes (Scotland) Limited Property development

Joint ventures

The Group’s investment in joint ventures is £2.1 million (31 December 2008 : £2.2 million).

Britannia Personal Lending Limited

MutualPlus Limited

The Group’s interest in Britannia Personal Lending Limited is as follows:

31 July 31 December

2009 2008

£m £m

Current assets 15.4 40.0

Long-term assets 61.3 56.3

76.7 96.3

Current liabilities 42.0 52.7

Long-term liabilities 34.7 43.6

76.7 96.3

Income 2.3 3.8

Expenses (2.4) (3.2)

(Loss)/profit before tax (0.1) 0.6

Taxation - (0.2)

(Loss)/profit after tax (0.1) 0.4

Joint ventures are accounted for using the equity method.

The directors do not consider the results of MutualPlus Limited to be significant to the Group.

The results of Britannia Personal Lending Limited are included in the Group results together with consolidation

adjustments of nil (31 December 2008 : £0.2 million).

Registered in Scotland and operating in the United Kingdom:

Unsecured personal lending

Subsidiary undertaking, registered in Scotland and operating in the United Kingdom, where the Society owns half the

share capital represented by its holding of all the ‘A’ class ordinary shares and the majority of voting rights:

The Society owns 49% of the ordinary shares in Britannia Personal Lending Limited and 50% of the ordinary shares in

MutualPlus Limited, which are registered in England and operate in the United Kingdom. The companies trade in the

businesses indicated:

Direct sales of financial services

Mortgage insurance company

During the 7 month period to 31 July 2009, the Society's investment in Britsafe Insurance Services (Guernsey) Limited

of £5.1 million was repaid.

Deposit taking

Provision of branch-sharing services

61 of 120




Other directly held associated bodies

Securitisation vehicles

Leek Finance Holdings Limited Holding company

Leek Finance Number One plc Securitisation company

Leek Finance Holdings Number Two Limited Holding company

Leek Finance Number Two plc Securitisation company

Leek Finance Holdings Number Three Limited Holding company

Leek Finance Number Three plc Securitisation company

Leek Finance Holdings Number Four Limited Holding company

Leek Finance Number Four Limited Securitisation company

Leek Finance Holdings Number Five Limited Holding company

Leek Finance Number Five Limited Securitisation company

Leek Finance Holdings Number Six Limited Holding company

Leek Finance Number Six Limited Securitisation company

Leek Finance Holdings Number Seven Limited Holding company

Leek Finance Number Seven plc Securitisation company

Leek Finance Holdings Number Eight Limited Holding company

Leek Finance Number Eight Limited Securitisation company

Leek Finance Holdings Number Nine Limited Holding company

Leek Finance Number Nine Limited Securitisation company

Leek Finance Holdings Number Ten Limited Holding company

Leek Finance Number Ten plc Securitisation company

Leek Finance Holdings Number Eleven Limited Holding company

Leek Finance Number Eleven plc Securitisation company

Leek Finance Holdings Number Twelve Limited Holding company

Leek Finance Number Twelve plc Securitisation company

Leek Finance Holdings Number Fourteen Limited Holding company

Leek Finance Number Fourteen plc Securitisation company

Leek Finance Holdings Number Fifteen Limited Holding company

Leek Finance Number Fifteen plc Securitisation company

Leek Finance Holdings Number Sixteen Limited Holding company

Leek Finance Number Sixteen plc Securitisation company

Leek Finance Holdings Number Seventeen Limited Holding company

Leek Finance Number Seventeen plc Securitisation company

Leek Finance Holdings Number Eighteen Limited Holding company

Leek Finance Number Eighteen plc Securitisation company

Leek Finance Holdings Number Nineteen Limited Holding company

Leek Finance Number Nineteen plc Securitisation company

Leek Finance Holdings Number Twenty Limited Holding company

Leek Finance Number Twenty plc Securitisation company

Leek Finance Holdings Number Twenty One Limited Holding company

Leek Finance Number Twenty One plc Securitisation company

The results of the following securitisation vehicles are consolidated into the results of the Group under IAS 27

Consolidated and Separate Financial Statements:

The Society has membership rights in VocaLink Holdings Limited (VocaLink), a private limited company registered

in England, and Funds Transfer Sharing Limited (FTS), a private company registered in England limited by guarantee.

VocaLink provides the Society and others with automated-teller-machine facilities operating throughout the United

Kingdom. Both FTS and VocaLink are directly held associated bodies of the Society. Their results have been excluded

from the accounts as, in the opinion of the directors, they are not material.

62 of 120


All of the above companies are related parties to the Group. See Note 60 for the related party disclosures.

Leek Finance Holdings Number Twenty Two Limited Holding company

Meerbrook Finance Number Two Limited

Meerbrook Finance Holdings Number Three Limited

Meerbrook Finance Number One Limited

Meerbrook Finance Holdings Number Two Limited

Meerbrook Finance Number Three Limited

Securitisation company

Holding company


Holding company


Holding company


Leek Finance Number Twenty Two plc

Meerbrook Finance Holdings Number One Limited

Holding company


Holding company


Holding company


Rudyard Finance Holdings Number One Limited Holding company



Rudyard Finance Number One plc

Dovedale Finance Number One plc

The Society holds one non-voting share in Leek Finance Holdings Limited, representing 12.5% of the issued share

capital.

All securitisation vehicles are registered in England and operate in the United Kingdom, with the exception of

Dovedale Finance Number One plc, which is registered and operates in the Republic of Ireland.



Meerbrook Finance Holdings Number Four Limited

Meerbrook Finance Number Four Limited

Meerbrook Finance Holdings Number Five Limited

Meerbrook Finance Number Five Limited

Meerbrook Finance Holdings Number Six Limited

Meerbrook Finance Number Six Limited

63 of 120

29. Goodwill

31 July 31 December

2009 2008

£m £m

194.8 194.8

157.9 157.9

-

-

- Platform’s interest margin remains constant at 0.91%;

- Platform’s cost/asset ratio remains constant at 0.51%; and

- cash flows are discounted using a discount rate of 7.15%.

-

-

-

-

-

The calculations have been flexed to assess the sensitivities to reasonable changes in the already conservative

assumptions. This sensitivity analysis did not indicate any likely impairment of the goodwill.



Net book amount

At beginning and end of period

Group

At beginning and end of period

Society

Net book amount

The Society's goodwill at 31 July 2009 and 31 December 2008 relates to the acquisition of the branch network and retail

savings business of Bristol & West of £157.9 million. The goodwill in the Group additionally relates to its holding in

Platform Group Holdings Limited of £36.9 million.

The CGU to which the Bristol & West goodwill has been allocated is the combined branch networks and retail savings

businesses of the Member Business. Its recoverable amount has been calculated by considering the value in use of the

Member Business as a whole. The key assumptions used in the calculation are shown below. These have been

determined using past experience, understanding of the business and its industry, and recognition of current market

events with respect to retail deposit-taking business:

the level of Platform’s loans and advances to customers are as per the budget for 2009. The figures for 2010 - 2012

are as per the budget, after which point the level is constant to 2018;

In accordance with IAS 38 Intangible Assets the goodwill has been assessed as having an indefinite useful life. In

assessing the recoverable amount of the goodwill the Group allocates the goodwill to the lowest cash generating unit

(CGU) within the Group. A CGU is the smallest identifiable group of assets that generates cash inflows which are

largely independent of the cash inflows from other assets of the Group.

The CGU to which the Platform goodwill has been allocated is the Platform Group. Its recoverable amount has been

calculated on a value-in-use basis by reviewing the CGU's pre-tax cash flows. The key assumptions used in the

calculation are shown below. These have been determined using past experience, understanding of the business and its

industry, and recognition of current market events with respect to loans and advances balances:

a period of greater than five years is considered appropriate because Platform loans and advances and funding are

long term, and ten years allows recognition of the cash flows expected to be generated throughout the whole of an

economic cycle;

cash flows are discounted using a discount rate of 5.80%.

the budget for the Member Business for 2009/10 assumes that economic conditions will not improve in the short to

medium term;

interest rates remain low and Member Business interest margin remains constant at approximately 1%;

the business makes process improvements and further reduces administrative expenses maintaining a cost/asset

ratio of 0.59%;

other income remains flat; and

64 of 120



30. Intangible assets

Total Total

31 July 31 December 31 July 31 December 31 July 31 December

2009 2008 2009 2008 2009 2008

£m £m £m £m £m £m

Group

Cost

At beginning of period 207.8 194.5 3.6 3.6 211.4 198.1

Additions 5.2 13.3 - - 5.2 13.3

At end of period 213.0 207.8 3.6 3.6 216.6 211.4


Charge for the period 8.3 16.1 0.2 0.4 8.5 16.5

At end of period 178.8 170.5 1.4 1.2 180.2 171.7

Net book amount at end

of period 34.2 37.3 2.2 2.4 36.4 39.7

Society

Cost


Additions 4.9 11.3 - - 4.9 11.3

At end of period 204.3 199.4 3.6 3.6 207.9 203.0


Charge for the period 7.4 14.8 0.2 0.4 7.6 15.2

At end of period 172.9 165.5 1.4 1.2 174.3 166.7

Net book amount at end

of period 31.4 33.9 2.2 2.4 33.6 36.3

Internally generated intangible assets consist of software development costs.

Accumulated amortisation

Accumulated amortisation

Internally generated

intangible assets Other intangible assets

65 of 120



31. Investment properties

Group Group

31 July 31 December

2009 2008

£m £m

Cost

At beginning of period 106.6 -

Additions - acquisitions 21.1 106.6

Additions - subsequent expenditure 5.6 -

Disposals (0.1) -

At end of period 133.2 106.6

Accumulated depreciation

At beginning of period 1.1 -

Charge for the period 1.0 1.1

Elimination on disposals - -

At end of period 2.1 1.1

Net book amount at end of period 131.1 105.5

The accumulated impairment provision included within the accumulated depreciation as at 31 July 2009 is £1.0 million

(31 December 2008 : £1.0 million).

Included in rent receivable for the Group for the 7 month period to 31 July 2009 is £1.5 million (12 months ended 31

December 2008 : £0.1m) of rental income relating to investment properties (Note 8).

No valuation by an independent professionally qualified valuer has been performed. The directors consider that the

amortised cost of the investment properties at 31 July 2009 is a fair approximation of their fair value, based on a

discounted cash flow calculation of the future expected rental income and sale proceeds from the investment properties.

The Group lets investment properties on Assured Shorthold Tenancy agreements most of which are for contract periods

of no more than 12 months. The future minimum lease receipts under non-cancellable operating leases are £3.1 million

(31 December 2008 : £0.2 million). The Group has not recognised any contingent rent in the period (31 December 2008

: nil). None of the lease agreements are individually significant.

Included within investment properties are properties with a carrying value of £21.0 million (31 December 2008 : £103.4

million) obtained during the period by the exercise of collateral held as security. All investment properties are held to

generate rental income until such time that the Group considers it appropriate to realise its investment.

66 of 120



32. Property, plant and equipment

Land and

buildings

Leasehold

improvements

Equipment,

fittings, fixtures

and vehicles Total

£m £m £m £m


Cost

At beginning of period 41.3 97.4 117.4 256.1

Additions - 0.2 1.4 1.6

Disposals (0.5) (0.1) - (0.6)

At end of period 40.8 97.5 118.8 257.1




Elimination on disposals - (0.2) - (0.2)

At end of period 5.2 72.7 106.6 184.5

Net book amount at end of period 35.6 24.8 12.2 72.6


Cost


Additions - 5.2 3.5 8.7

Disposals (0.8) - - (0.8)

At end of period 41.3 97.4 117.4 256.1




Elimination on disposals - - - -

At end of period 5.0 69.3 103.6 177.9


Group

67 of 120



32. Property, plant and equipment (continued)

Land and

buildings

Leasehold

improvements

Equipment,

fittings, fixtures

and vehicles Total

£m £m £m £m


Cost


Additions - 0.2 1.3 1.5

Disposals (0.4) (0.1) - (0.5)

At end of period 24.8 94.9 112.0 231.7




Elimination on disposals - (0.2) - (0.2)

At end of period 2.6 70.2 101.0 173.8



Cost


Additions - 5.2 2.7 7.9

Disposals (0.8) - - (0.8)

At end of period 25.2 94.8 110.7 230.7




Elimination on disposals - - - -

At end of period 2.5 66.8 98.5 167.8


Assets held under finance leases consist of one building:

Group and

Society

Group and

Society

31 July 31 December

2009 2008

£m £m

Net book amount 0.6 0.6

Society

68 of 120



33. Deferred tax

The movement on the deferred tax account is as follows:



2009 2008 2009 2008

£m £m £m £m

At beginning of period 53.2 7.6 38.3 (2.6)

(Charge)/credit to reserves (10.7) 45.9 (10.5) 46.5

Income statement credit/(charge) 10.0 (0.3) (5.4) (5.6)

At end of period 52.5 53.2 22.4 38.3

Deferred tax assets are attributable to the following items:



2009 2008 2009 2008

£m £m £m £m

Accelerated tax depreciation (3.0) (1.5) (2.4) (0.9)

Pensions and other post-retirement benefits - 7.8 - 7.8

Allowance for losses on loans and advances 1.0 - - -

Capital gains (1.8) (1.8) (1.6) (1.6)

Tax losses carried forward 19.2 16.3 16.9 14.0

Other temporary differences 37.1 32.4 9.5 19.0

52.5 53.2 22.4 38.3



2009 2008 2009 2008

£m £m £m £m

Accelerated tax depreciation (1.5) 5.0 (1.4) 4.4

Pensions and other post-retirement benefits (0.8) - (0.8) -

Allowances for losses on loans and advances 1.0 - - -

Capital gains - (0.2) - (0.1)

Tax losses carried forward 6.6 2.4 6.6 (9.0)

Other temporary differences 4.7 (7.5) (9.7) (0.9)

10.0 (0.3) (5.3) (5.6)

Deferred tax assets are recognised for tax loss carry-forwards only to the extent that realisation of the related tax benefit

is probable.

Deferred tax is calculated on all temporary differences under the liability method using an effective tax rate of 28%

(31 December 2008 : 28%).

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against

current tax liabilities and when the deferred taxes relate to the same fiscal authority.

The deferred tax credit/(charge) in the income and expenditure account comprises the following temporary differences:

Deferred tax assets expected to be recoverable after one year are Group £41.9 million (31 December 2008 : £30.9

million) and Society £11.8 million (31 December 2008 : £15.4 million).

69 of 120



34. Other assets



2009 2008 2009 2008

£m £m £m £m

Amounts recoverable within one year

amounts owed by subsidiary undertakings - - 11,117.5 9,318.1

other 18.0 10.7 12.4 6.8

18.0 10.7 11,129.9 9,324.9

There are no formal repayment terms with subsidiary companies. All balances are repayable on demand.

35. Prepayments and accrued income



2009 2008 2009 2008

£m £m £m £m

Accrued income relating to derivative instruments 93.0 89.9 93.0 89.9

Other 29.2 39.6 27.6 37.9

122.2 129.5 120.6 127.8

36. Shares

Group and

Society

Group and

Society

31 July 31 December

2009 2008

£m £m

16,631.5 17,234.1

Shares are repayable from the balance sheet date in the ordinary course of business as follows:

195.0 486.3

12,765.3 13,306.2

1,098.3 556.6

1,912.7 2,300.7

660.2 584.3

16,631.5 17,234.1

The Group has entered into interest-rate swaps that protect it from changes in interest rates on the floating-rate assets

that are funded by its fixed-rate shares. Changes in the fair values of these swaps are offset by changes in the fair values

of the fixed-rate shares. The changes in the fair value of fixed-rate shares are the fair-value adjustments for hedged risk

disclosed below.

Held by individuals

Accrued interest

Repayable on demand

in more than one year

in more than three months but not more than one year

Other shares by residual maturity repayable

in not more than three months

Included within amounts owed by subsidiary undertakings for the Society is the investment in the covered bond issued

by Britannia Covered Bonds LLP during the period.

70 of 120



36. Shares (continued)

37. Guaranteed equity bonds



2009 2008 2009 2008

£m £m £m £m

Shares 1,528.5 1,413.6 1,528.5 1,413.6

Other 64.7 66.8 - -

1,593.2 1,480.4 1,528.5 1,413.6

Guaranteed equity bonds are repayable from the balance sheet date in the ordinary course of business as follows:

in not more than three months 103.5 59.4 102.7 57.4

in more than three months but not more than one year 239.4 269.3 224.0 267.9

in more than one year 1,250.3 1,151.7 1,201.8 1,088.3

1,593.2 1,480.4 1,528.5 1,413.6

None of the change in the fair value of the GEBs is attributable to changes in the liability’s credit risk.

Included within shares are fixed-rate accounts with a total nominal value of £5,172.0 million (31 December 2008 :

£2,926.7 million) against which there are fair-value adjustments for hedged risk of £22.8 million (31 December 2008 :

£53.3 million), giving a total carrying value of £5,194.8 million (31 December 2008 : £2,980.0 million).

The guaranteed equity bonds (GEBs) have been designated on initial recognition at fair value through profit and loss,

and are carried at their fair value.

The Group hedges all of its GEBs with swaps. The gain on GEBs in the income and expenditure account for the 7

month period to 31 July 2009 is £14.0 million (12 months ended 31 December 2008 : £139.6 million, including GEBs

held by Britannia International Limited). However, taking into account changes in fair value of the associated swaps, the

net impact to the income and expenditure account for the 7 month period to 31 July 2009 is a loss of £1.0 million (12

months ended 31 December 2008 : loss of £3.8 million).

The fair value for the GEBs are obtained on a monthly basis from third parties that issue these products. These external

valuations are reviewed independently using valuation software to ensure the fair values are priced on a consistent basis.

The nominal value of the GEBs held as shares is £1,517.8 million (31 December 2008 : £1,389.7 million). The nominal

value of other GEBs is £64.5 million (31 December 2008 : £65.9 million).

The maximum amount the Group would contractually be required to pay at maturity for all the GEBs is £1,616.9 million

(31 December 2008 : £1,431.7 million).

Guaranteed equity bonds by residual maturity repayable

71 of 120



38. Deposits from banks



2009 2008 2009 2008

£m £m £m £m

Overdraft 43.7 3.7 41.8 -

Deposits from other banks 6,073.9 6,933.1 5,587.6 6,282.8

6,117.6 6,936.8 5,629.4 6,282.8

Deposits from banks are repayable from the balance sheet date in the ordinary course of business as follows:


In not more than three months 4,708.4 5,627.3 4,631.6 5,622.1

In more than three months but less than one year 665.7 588.5 664.8 588.4

In more than one year 716.4 655.0 308.0 8.9

6,117.6 6,936.8 5,629.4 6,282.8

39. Other deposits



2009 2008 2009 2008

£m £m £m £m


In not more than three months 1,399.3 1,497.3 287.4 560.4


In more than one year 38.2 33.4 14.7 32.7

1,678.0 2,054.5 405.5 828.2

Other deposits are contractually repayable from the balance sheet date in the ordinary course of business as follows:

72 of 120



40. Debt securities in issue



2009 2008 2009 2008

£m £m £m £m

Certificates of deposit 42.0 398.4 42.1 398.4

Fixed and floating rate notes 4,287.4 4,835.1 1,681.4 1,895.9

4,329.4 5,233.5 1,723.5 2,294.3



2009 2008 2009 2008

£m £m £m £m


In not more than three months 130.9 644.9 63.7 568.3


In more than one year 3,267.3 4,082.8 773.5 1,238.3

4,329.4 5,233.5 1,723.5 2,294.3

Foreign-exchange gains less losses on debt securities in issue are included in Note 6.

Taking into account changes in the fair values of associated swaps, the net impact of fair-value movements on debt

securities in issue to the income and expenditure account for the 7 month period to 31 July 2009 is nil (12 months ended

31 December 2008 : nil). The Group fair-value movements on debt securities in issue in the income and expenditure

account for the 7 month period to 31 July 2009 were gains of £560.9 million (12 months ended 31 December 2008 : loss

of £1,207.6 million). The gains for the Society for the 7 month period to 31 July 2009 were £224.5 million (12 months

ended 31 December 2008 : losses of £531.2 million).

For the purpose of the maturity analysis below, it has been assumed that debt securities will be repaid on the next

interest step-up date of each security, where applicable. Otherwise the contractual maturity has been assumed. Debt

securities in issue are repayable from the balance sheet date in the ordinary course of business as follows:

Fair-value adjustments to debt securities in issue attributable to hedged risk in the Group are £632.9 million (31

December 2008 : £1,193.8 million) and in the Society are £269.9 million (31 December 2008 : £496.4 million).

The Group has entered into cross-currency interest-rate swaps that protect it from changes in exchange rates and interest

rates on its debt securities in issue. Changes in the fair values of these swaps are offset by changes in the fair values of

the debt securities in issue. The changes in fair value of the debt securities in issue are disclosed on the balance sheet as

fair-value adjustments for hedged risk.

73 of 120



41. Other liabilities



2009 2008 2009 2008

£m £m £m £m

Amounts falling due within one year

amounts owed to subsidiary undertakings - - 3,501.4 1,904.7

other creditors 53.4 55.2 42.5 50.2

53.4 55.2 3,543.9 1,954.9

Amounts falling due after one year

other creditors 0.7 0.7 0.6 0.6

54.1 55.9 3,544.5 1,955.5

There are no formal repayment terms with subsidiary companies. All balances are repayable on demand.

Other creditors for the Group and Society include finance lease obligations as follows:


2009 2008 2009 2008

£m £m £m £m

Due within one year - - - -

Due between one year and five years 0.1 0.1 0.1 0.1

Due after five years 0.5 0.5 1.8 1.8

0.6 0.6 1.9 1.9

Other creditors for the Group and Society include £18.9 million (31 December 2008 : £18.4 million) in respect of the

Britannia Membership Reward for the period (Note 14).

The future minimum lease payments have been discounted at Libor over the term of the lease to give the present value

of these payments.

Present value of lease

payments

Future minimum lease

payments

74 of 120



42. Provisions for liabilities and charges

Compensation

schemes' levies

Vacant

property Regulatory Total

£m £m £m £m

Group

At 1 January 2009 19.8 4.1 0.4 24.3

Income statement movements:

Provided in the period 0.3 0.2 - 0.5

Released during the period (2.1) (0.2) - (2.3)

Utilised during the period (7.9) (0.1) (0.3) (8.3)

At 31 July 2009 10.1 4.0 0.1 14.2

Society

At 1 January 2009 19.8 2.7 0.4 22.9

Income statement movements:

Provided in the period - 0.2 - 0.2

Released during the period (2.1) (0.1) - (2.2)

Utilised during the period (7.6) (0.1) (0.3) (8.0)

At 31 July 2009 10.1 2.7 0.1 12.9

Provisions were analysed as follows:



2009 2008 2009 2008

£m £m £m £m

Amounts falling due within one year 11.6 10.0 11.1 9.5

Amounts falling due after one year 2.6 14.3 1.8 13.4

14.2 24.3 12.9 22.9

Compensation schemes' levies

Vacant property

The Group has a number of leasehold properties available for rent. Provisions are made when either the sub-lease

income does not cover the rental expense or the property is vacant. The provision is based on the expected outflows

during the remaining periods of the leases using the Member Business discount rate of 5.8%.

In common with other financial institutions authorised by the Financial Services Authority (FSA), the Society

contributes to the Financial Services Compensation Scheme (FSCS). The FSCS covers financial institutions authorised

by the FSA to do business in the United Kingdom. When an FSA-authorised institution goes out of business its

customers, including retail depositors, may be able to claim compensation from the FSCS. The FSCS raises funds to

meet known compensation claims through levies on other FSA-authorised institutions.

Following the recent failures of FSA-authorised retail deposit-taking institutions, the Society has been notified by the

FSCS that it will be making levies against the Society. The FSCS has provided the Society with a provisional estimate

of the total levy that it expects to make for the year to 31 March 2010 against all FSA-authorised institutions that take

retail deposits. At the date of signing of these accounts these amounts and the Society's share of them remained

uncertain. Based on the information available, the Society has estimated that its total liability for the year to 31 March

2010 will be £10.1 million and has provided for this amount in full.

The Financial Services Commission (FSC) in the Isle of Man operates a similar scheme. The FSC has raised a levy of

£0.3 million on Britannia International Limited which has been paid during the 7 month period to 31 July 2009.

75 of 120



42. Provisions for liabilities and charges (continued)

43. Accruals and deferred income



2009 2008 2009 2008

£m £m £m £m

97.5 97.5 97.5 97.5

11.1 4.3 11.1 4.3

1.5 6.5 1.5 6.5

82.5 45.1 53.8 27.3

192.6 153.4 163.9 135.6

15.2 19.6 9.6 9.3

207.8 173.0 173.5 144.9

44. Subordinated liabilities

Interest rate Interest rate

Group and

Society

Group and

Society


2009 2008 2009 2008

% % £m £m

1.546 4.460 157.3 285.7

5.750 5.750 212.6 227.9

5.875 5.875 161.0 178.1

530.9 691.7

-

-

Included within subordinated liabilities are:

notes with a total value of £300.0 million (31 December 2008 : £300.4 million), against which there are fair-value

adjustments for hedged interest-rate risk of £25.3 million (31 December 2008 : £57.4 million) giving a total carrying

value of £325.3 million (31 December 2008 : £357.8 million); and

notes with a total nominal value of €184.2 million (31 December 2008 : €300.0 million), with a sterling equivalent

of £126.4 million (31 December 2008 : £206.0 million) against which there are fair-value adjustments for hedged

currency risk of £30.9 million (31 December 2008 : £79.7 million) giving a total carrying value of £157.3 million

(31 December 2008 : £285.7 million). The buy-back of subordinated liabilities during the period is explained in

Note 58.

Fixed-rate subordinated notes 2024

Fixed-rate subordinated notes 2033

On a winding-up, the claims of the subordinated noteholders are subordinated in right of payment to depositors and

other creditors, and those holding shares where the Society remains a building society. The notes are repayable at the

Society’s option and with the prior consent of the FSA on any interest date within five years of the maturity date.

Floating-rate subordinated notes 2016

Amounts falling due within one year

accruals relating to derivative financial instruments

other

interest accrued on subordinated liabilities

interest accrued on subscribed capital

other

Regulatory

Provisions have been made in respect of various potential customer-compensation claims. Claims are investigated on an

individual basis and, in some cases, compensation payments are made.

Amounts falling due after one year

76 of 120



45. Subscribed capital

Group and

Society

Group and

Society

31 July 31 December

2009 2008

£m £m

113.1 113.1

205.6 213.4

318.7 326.5

46. Retirement benefit asset

Amounts recognised in the balance sheet:

31 July 31 December 31 December 31 December 31 December

2009 2008 2007 2006 2005

£m £m £m £m £m

Britannia Building Society pension plan

surplus/(obligation) - - 45.0 (44.3) (73.0)

The Society operates a funded defined-benefit pension plan, that pays out pensions at retirement based on service and

final pay, for employees of the Society (and for certain employees of subsidiary undertakings) who commenced

employment prior to 1 September 2001, and an unfunded no charge supplementary plan for certain directors (Note 11).

A full actuarial valuation was carried out at 5 April 2008 and updated to 31 July 2009 by a qualified independent

actuary. Plan assets are stated at their bid value at 31 July 2009. The service cost for the defined-benefit section has

been calculated using the projected-unit method. As a result of the defined-benefit section being closed to new entrants,

its service cost as a percentage of members’ salaries will increase as the members approach retirement (but applied to a

pensionable payroll which is expected to decrease over time).

Interest is paid on the £110.0 million permanent interest bearing shares (PIBS) issued in 1992, in arrears at the rate of

13% per annum in half-yearly instalments. The shares are repayable only in the event of a winding-up of the Society or

otherwise with the consent of the FSA. Interest may not be paid or credited under certain circumstances.

Interest is paid on the £200.0 million PIBS issued in 2005 at a fixed rate at 5.5555% subject to the discretion of the

Society. If interest is not paid the Britannia Membership Reward cannot be paid.

In a winding-up or dissolution of the Society, the claims of the holders of PIBS would rank behind all other creditors of

the Society and the claims of members holding shares as to principal and interest. The holders of PIBS are not entitled

to any share in any final surplus upon winding-up or final dissolution of the Society.

Permanent interest bearing shares issued in 1992

Permanent interest bearing shares issued in 2005

The Group and Society balances comprise PIBS of £310.0 million (31 December 2008 : £310.0 million), the share

premium thereon of £3.1 million (31 December 2008 : £3.1 million) and a fair-value adjustment for hedged risk of £5.6

million (31 December 2008 : £13.4 million). The PIBS issued prior to 2005 are stated at nominal value. The carrying

value of the PIBS issued in 2005 includes the fair-value adjustments for hedged risk.

Group and Society

The movements in the PIBS in the income and expenditure account for the 7 month period to 31 July 2009 were gains of

£7.9 million (12 months ended 31 December 2008 : losses of £22.2 million).

The Group has entered into interest-rate swaps that protect it from changes in interest rates on the floating-rate assets

that are funded by these fixed-rate PIBS. Changes in the fair values of the swaps are offset by changes in the fair values

of the fixed-rate PIBS. The changes in the fair value of fixed-rate PIBS are the fair-value adjustments for hedged risk

disclosed below.

77 of 120



46. Retirement benefit asset (continued)

The amounts recognised in the balance sheet are determined as follows:


2009 2008 2007 2006 2005

£m £m £m £m £m

Fair value of plan assets 411.9 413.0 407.5 364.8 331.5

Present value of funded obligations (402.6) (309.6) (349.5) (404.6) (399.2)

Funded status 9.3 103.4 58.0 (39.8) (67.7)

Amount of pension surplus not recognised

under IAS 19 (4.7) (99.8) (9.0) - -

Present value of unfunded obligations (4.6) (3.6) (4.0) (4.5) (5.3)

Asset/(liability) in the balance sheet - - 45.0 (44.3) (73.0)

Related deferred tax (liability)/asset

(Note 33) - - (12.6) 13.3 21.9

- - 32.4 (31.0) (51.1)


2009 2008 2007 2006 2005

£m £m £m £m £m

Change in benefit obligation

Benefit obligation at beginning of period 313.2 353.5 409.1 404.5 272.4

Current service cost 4.4 6.2 7.7 7.7 4.3

Interest cost 11.9 20.5 21.0 19.3 14.5

Plan members’ contributions - 2.7 2.7 2.7 2.7

Actuarial losses/(gains) 83.1 (61.7) (81.4) (18.9) 115.3

Benefits paid (5.4) (8.0) (5.6) (6.2) (4.7)

Benefit obligation at end of period 407.2 313.2 353.5 409.1 404.5

Analysis of defined-benefit obligation

Plans that are wholly or partly funded 402.6 309.6 349.5 404.6 399.2

Plans that are wholly unfunded 4.6 3.6 4.0 4.5 5.3

407.2 313.2 353.5 409.1 404.5

The assumptions that have the most significant effect on the results of the valuation are those relating to the long-term

return on plan assets, salary increases, inflation and mortality rates. These are shown on page 80 . In addition,

allowances have been made for the age-related promotional salary scale and increases in post-retirement benefits.

For those eligible employees who commenced employment after 1 September 2001, the Society operates a defined-

contribution plan. In addition, the Group operates defined-contribution plans for other Group employees. During the 7

month period to 31 July 2009 the Group paid contributions of £3.7 million (12 months ended 31 December 2008 : £4.2

million) and Society £3.1 million (12 months ended 31 December 2008 : £3.1 million).

Where the present value of the Group's defined-benefit obligation less the fair value of plan assets results in a surplus, to

the extent that it is not recoverable the surplus is not recognised and is available for offset against any future actuarial

losses which may arise in the plan. The recoverability of the surplus is tested, in accordance with IAS 19 and IFRIC 14,

by reference to future service costs, expected investment returns on pension plan assets and interest cost on liabilities.

From 1 January 2009 the Society introduced a salary-sacrifice arrangement. The members that participate in this

arrangement are not required to contribute to the pension plan, instead the Society pays an additional amount equal to

the member contribution that the member would have paid had they opted out of the salary-sacrifice arrangement.

Group and Society

Group and Society

78 of 120





2009 2008 2007 2006 2005

£m £m £m £m £m

Change in plan assets

Fair value of plan assets at beginning of

period 413.0 407.5 364.8 331.5 252.0

Expected return on plan assets 13.0 24.5 23.4 20.3 16.5

Actuarial (losses)/gains (14.8) (48.9) 15.2 9.0 29.5

Society contribution (includes benefits

paid and reimbursed) 6.1 35.2 7.0 7.5 35.5

Member contributions - 2.7 2.7 2.7 2.7

Benefits paid (by fund and Society) (5.4) (8.0) (5.6) (6.2) (4.7)

Fair value of plan assets at end of period 411.9 413.0 407.5 364.8 331.5

7 months

ended

12 months

ended

12 months

ended

12 months

ended

12 months

ended


2009 2008 2007 2006 2005

£m £m £m £m £m

Components of pension cost

Current service cost 4.4 6.2 7.7 7.7 4.3

Interest cost 11.9 20.5 21.0 19.3 14.5

Expected return on plan assets (13.0) (24.5) (23.4) (20.3) (16.5)

Total pension cost recognised in the

income and expenditure account 3.3 2.2 5.3 6.7 2.3

Actuarial gains/(losses) immediately

recognised 1.9 21.8 96.6 27.9 (87.1)

Amount of pension surplus not recognised

under IAS 19 (4.7) (99.8) (9.0) - -

Plan assets

The weighted average asset allocations at the period end were as follows:


2009 2008 2007 2006 2005

% % % % %

Equities 28 41 46 69 66

Bonds and gilts 55 58 53 30 31

Other 17 1 1 1 3

The plan's assets include no assets from the Society's own financial instruments and include no property occupied by, or

other assets used by, the Society.

Total pension gains/(losses) recognised in

the statement of other comprehensive

income

The Society holds derivative contracts as part of its investment portfolio. These assets have been included within the

categories above relating to the nature of the portfolio held.

1.9 21.8

Group and Society

Group and Society

96.6 27.9 (87.1)

Group and Society

79 of 120





2009 2008 2007 2006 2005

% % % % %

(0.4) (5.3) 11.1 9.1 17.9

Weighted average assumptions used to determine benefit obligations


2009 2008 2007 2006 2005

% % % % %

5.9 6.5 5.8 5.1 4.8

3.6 3.0 3.3 3.1 2.8

3.6 3.0 3.3 4.6 4.3

Weighted average assumptions used to determine net pension cost


2009 2008 2007 2006 2005

% % % % %

6.5 5.8 5.1 4.8 5.3

3.0 3.3 3.1 2.8

6.0 6.0 6.0 6.1 6.5

3.0 3.3 4.6 4.3 4.0

Assumptions on mortality used to determine benefit obligations


2009 2008 2007 2006 2005

Years Years Years Years Years

a member aged 65 has a current life

expectancy of 23.0 23.0 21.3 21.3 21.3

a member aged 40 has a life expectancy

at 60 of 29.0 29.0 27.8 27.8 27.8

Female

a member aged 65 has a current life

expectancy of 26.4 26.4 24.3 24.3 24.3

a member aged 40 has a life expectancy

at 60 of 31.6 31.6 30.7 30.7 30.7

Expected long-term return on plan assets

Salary increases

Rate of inflation

Discount rate

To develop the expected long-term rate of return on assets assumption, the Society considered the current level of

expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium

associated with the other asset classes in which the portfolio is invested and the expectations for the future returns on

each asset class. The expected return for each asset class was then weighted, based on the target asset allocation, to

develop the expected long-term rate of return on assets assumption for the portfolio. This resulted in the selection of the

5.4% assumption which was used in the 7 month period to 31 July 2009.

Actual return on plan assets

Discount rate

Rate of inflation

Group and Society

Group and Society

The assumptions on mortality are determined by actuarial tables, known as PCA00 medium cohort tables, applicable to

each member's year of birth with a 1% underpin to future improvements.

Group and Society

Male

Life expectancy

Life expectancy

Group and Society

Salary increases

In addition to the salary increases shown above, an allowance for annual promotional salary increases is also made.

80 of 120




History of experience gains and losses


2009 2008 2007 2006 2005

Experience (losses)/gains on plan assets

amount (£m) (14.8) (48.9) 15.2 9.0 29.5

percentage of plan assets (%) (4) (12) 4 2 9

Experience losses on plan liabilities

amount (£m) - (0.3) (7.6) - (8.6)

percentage of plan liabilities (%) - - 2 - 2

(Losses)/gains due to changes in

assumptions

amount (£m) (83.1) 62.0 89.0 18.9 (108.0)

percentage of plan liabilities (%) (21) 20 25 5 27

Total gains and losses

amount (£m)

recognised (102.6) (87.0) 87.6 27.9 (87.1)

unrecognised 4.7 99.8 9.0 - -

percentage of plan liabilities (%) - 7 28 7 22

Sensitivity of results to changes in key assumptions

Assumption

Discount rate

Rate of inflation

Real rate of increase in salaries

Longevity

Cash commutation

Contributions

The Society expects to contribute to its pension plan from 31 July 2009 at the rate of 23% of the total pensionable

salaries of its defined-benefit section members including the cost of the levy payable to the Pension Protection Fund. In

addition, as disclosed above, from 1 January 2009 the Society introduced a salary-sacrifice arrangement. The expected

additional level of Society contribution as a result of the salary sacrifice arrangment is 7.9% of pensionable salaries.

Group and Society

Increase/decrease by 0.1% +/- £8.0m

Increase/decrease by 0.1%

Increase/decrease by 0.1%

Increase/decrease by 2 years

Removal of allowance for 85% cash

commutation

+/- £6.7m

+/- £2.2m

+/- £16.3m

+ £12.1m

Change in assumption

Indicative effect on

scheme's liabilities

81 of 120



47. Commitments and contingent liabilities



2009 2008 2009 2008

£m £m £m £m

Irrevocable undrawn loan facilities 103.2 239.1 72.7 87.6

112.4 260.4 81.9 108.9

Capital commitments for which no provision has been made in the accounts

Group and

Society

Group and

Society

31 July 31 December

2009 2008

£m £m

Capital expenditure contracted for:

intangible assets - 0.2

investment properties 0.2 -

Commitments under operating leases

Land and

buildings

Land and

buildings Equipment Equipment


2009 2008 2009 2008

£m £m £m £m

Group

Leases which expire

in not more than one year 0.7 0.3 1.1 0.1

in more than one year but not more than five years 8.6 5.9 0.8 0.7

in more than five years 132.0 102.7 - -

141.3 108.9 1.9 0.8

Society

Leases which expire

in not more than one year 0.7 0.3 1.1 0.1

in more than one year but not more than five years 3.9 4.6 0.8 0.7

in more than five years 96.2 102.7 - -

100.8 107.6 1.9 0.8

The total value of future minimum sub-lease payments expected to be received under non-cancellable sub-leases for the

Group was £5.4 million and for the Society was £4.4 million (31 December 2008 : Group: £3.0 million, Society £3.0

million).

The Group leases various properties and equipment under non-cancellable operating lease arrangements. The leases

have various terms, ranging from 6 months to 999 years. None of these leases are individually material and none have

any material clauses. The table below discloses the minimum operating lease payments the Group and the Society will

be required to make over the remaining lives of the leases.

Commitments

Undrawn formal standby facilities, credit lines and other

commitments to lend greater than one year

All of the undrawn commitments are at typical market rates and terms and, therefore, no liability has been recorded in

the accounts in respect of these.

9.2 21.3 9.2 21.3

82 of 120



47. Commitments and contingent liabilities (continued)

FSCS levy commitments

Contingent liabilities

Pledged assets

The Group and Society have loans and advances to banks of nil (31 December 2008 : £199.0 million) under reverse

sale and repurchase agreements and against which it holds gilts with a fair value of nil (31 December 2008 : £200.0

million). These transactions are conducted under terms that are usual and customary to standard stock lending,

securities borrowing and reverse purchase agreements. The Group is permitted to sell or repledge the assets received as

collateral in the absence of their default. The Group is obliged to return equivalent securities. At 31 July 2009 the fair

value of collateral repledged amounted to nil (31 December 2008 : £50.0 million). The Group and Society do not adjust

for the fair value of securities received under reverse sale and repurchase agreements.

The Society has an obligation under section 22 of the Building Societies Act 1986 to discharge the liabilities of its

subsidiary undertakings incurred prior to 11 June 1996 in so far as those subsidiaries are unable to discharge the

liabilities out of their own assets.

In common with other FSA-authorised financial institutions, the Society has a commitment to pay contributions to the

FSCS when required. The Society has provided in full for its estimate of its share of the claims against the scheme for

2009/10 of which it has been notified (Note 42). The FSCS has also indicated that there will be claims against the

scheme for 2010/11 and 2011/12 that will be of similar magnitude. Claims will continue after these dates but it is too

soon to be able to estimate the size of the Society's commitment for these years with any great accuracy. The claims

will depend on a number of unknown variables, including future interest rate movements, recoveries made by the

FSCS, other bank failures and the level of the Society's retail deposits compared with the industry as a whole.

At 31 July 2009, the mandatory reserve deposits held with the Bank of England were £22.7 million (31 December 2008

: £22.0 million).

Investment securities with a carrying value of £3,829.5 million (31 December 2008 : £4,723.5 million) have been sold

under sale and repurchase agreements. These assets have not been derecognised as the Group has retained substantially

all the risks and rewards of ownership. Included within deposits from banks are the related liabilities of £3,130.3

million (31 December 2008 : £4,133.9 million).

Assets are pledged as collateral under repurchase agreements with other banks. Mandatory reserve deposits are also

held with the Bank of England in accordance with statutory requirements. These deposits are not available to finance

the Group’s day-to-day operations.

83 of 120



48. General reserve

Movements in general reserves were as follows:

31 July 31 December

2009 2008

Group £m £m

Balance at beginning of period 1,203.5 1,254.5

Profit for the financial period 18.2 5.2

Actuarial losses on retirement benefit plan (2.1) (56.2)

At end of period 1,219.6 1,203.5

Society

Balance at beginning of period 1,010.9 1,057.2

Profit for the financial period 50.1 9.9

Actuarial losses on retirement benefit plan (2.1) (56.2)

At end of period 1,058.9 1,010.9

General reserves comprise accumulated retained profits and acturarial gains and losses.

84 of 120



49. Available-for-sale reserve

Movements in the reserve were as follows:

31 July 31 December

2009 2008

Group £m £m

Balance at beginning of period (97.4) (68.0)

Net movements in fair value (16.6) (68.3)

Deferred tax 4.6 19.2

Amortisation of reserve relating to investment securities reclassified as loans and

receivables 34.8 42.8

Deferred tax (9.7) (12.0)

Net gains transferred to gains less losses from investment securities (6.2) (15.3)


At end of period (88.8) (97.4)

Society

Balance at beginning of period (98.5) (67.7)

Net movements in fair value (16.4) (69.9)


Amortisation of reserve relating to investment securities reclassified as loans and

receivables 34.8 42.8

Deferred tax (9.7) (12.0)

Net gains transferred to gains less losses from investment securities (5.0) (15.6)


At end of period (88.8) (98.5)

The net movements in fair value for the period ended 31 December 2008 include fair value losses up to 1 July 2008, the

date of reclassification, on assets that were reclassified as loans and receivables of £101.9 million.

As explained in Note 25, the assets that were reclassified as loans and receivables during the period ended 31 December

2008 were transferred because the markets in which they are traded are no longer active. The Group has no intention of

selling these assets before they mature. Other than assets of £9.4 million (31 December 2008 : £8.6 million) against

which there are loss provisions of £3.9 million (31 December 2008 : £4.1 million), the assets are fully performing and

the Group expects to receive payment in full at maturity. The Group has no need to sell these assets in the foreseeable

future. Consequently the market prices of the reclassified assets are not relevant. Additionally, in an inactive market

such prices will not reflect actual trades. However, based on the available market data, if the reclassified assets were

still being carried at fair value, additional movements in fair value would have been recognised of approximately £0.2

billion (31 December 2008 : £0.6 billion).

The available-for-sale reserve comprises unrealised gains and losses on available-for-sale investment securities.

85 of 120



50. Cashflow hedging reserve



2009 2008 2009 2008

£m £m £m £m

Balance at beginning of period (33.6) 0.7 (30.7) 1.7

Net changes in fair value recognised directly in equity 31.3 (48.2) 29.3 (44.2)

Deferred taxes (8.1) 13.4 (7.5) 12.6

At end of period (12.7) (33.6) (11.4) (30.7)

51. Financial instruments strategy

52. Credit risk

Instruments used for risk management purposes include derivative financial instruments (derivatives), which are

contracts or agreements whose value is derived from one or more underlying price, rate or index inherent in the contract

or agreement, such as interest rates, exchange rates or stock market indices. The Group uses derivatives principally to

reduce market risk in its daily activities. Derivatives are not used in trading activity or for speculative purposes (Note

55).

The Group accepts deposits from customers at both fixed and floating rates, and for various periods, and seeks to earn

above-average interest margins by investing these funds in highly rated assets. The Group normally seeks to increase

these margins by consolidating short-term funds and lending for longer periods at higher rates, while maintaining

sufficient liquidity to meet all claims that might fall due. In a response to current economic conditions, the Group

continually seeks to borrow longer term funds to reduce its exposure to risk from maturity mismatches.

Credit risk is the risk that customers or treasury counterparties cannot meet their obligations to the Group as they

become due. Credit risk arises from loans provided to retail and commercial customers and from the liquid and

investment assets held by the Group. The Group has a broad exposure to credit risk with no particular concentrations of

geography, product type or borrower type, except as disclosed below. Limits on the level of credit risk by product,

industry sector and country are approved by the Board. The exposure to any borrower, including banks and brokers, is

further restricted by limits covering all balance sheet exposures.

Net losses transferred from equity to gains less losses

from derivative financial instruments

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability of another

entity. The Group is a retailer of financial instruments, mainly in the form of mortgages, savings and insurance products.

The Group raises wholesale funding using a variety of financial instruments (including, where appropriate, derivative

financial instruments) to invest in liquid asset balances and manage the risks arising from its operations.

The cashflow hedging reserve comprises fair value movements on derivatives that are protecting the Group from future

changes in expected cash flows. Approximately £2.7 million of these fair value movements will be reported in income

in the period from 1 August 2009 to 31 December 2009, with the remaining movements being reported in periods up to

2014. The cash flows to which they relate will occur during the same periods.

(2.3) 0.5 (2.5) (0.8)

86 of 120



52. Credit risk (continued)

Residential and commercial lending

- reviewing the type and quality of mortgage business accepted at both individual business line and Group level;

- evaluating actual arrears and repossession levels against trends and industry averages;

- setting exposure limits for the business and monitoring performance against them; and

- approving changes to lending policy or credit scoring mechanisms.

Member Business

BCIG residential mortgage business

- Platform’s intermediary-introduced business; and

- the acquired mortgage portfolios of Britannia Treasury Services (BTS).

The group credit committee limits the amount of risk accepted in relation to types of mortgage for both residential and

commercial lending. This includes exposure to buy-to-let, self-certified lending, new builds and levels of loan-to-value

across a number of different categories for both new lending and the portfolio overall.

The Group has a very low risk-appetite for Member Business mortgages. The residential lending policy includes criteria

such as loan amount, loan purpose, loan-to-value (LTV) ratio and affordability. All applications are assessed against this

policy and credit-scored and offers are made only to cases that meet the criteria. All other cases are referred to a team of

underwriters. Each underwriter has a mandate level based on their experience.

Lending policies and procedures are in place to limit and control the type and amount of lending that is underwritten.

The group credit committee is responsible for:

The Member Business mortgage portfolio consists of large numbers of lower value mortgages within the United

Kingdom. As at 31 July 2009 there were 143,507 Member Business mortgages (31 December 2008 : 147,014), with 9

over £1 million (31 December 2008 : 10) .

The servicing of most of the BCIG residential mortgages is undertaken by Western Mortgage Services (WMS), a wholly

owned subsidiary of the Group. A small portfolio of mortgages is administered under a servicing agreement with

Homeloans Management Limited (a subsidiary of Skipton Building Society). It is planned that the servicing of these

loans will be transferred to WMS in 2010.

When compared to other lenders operating in similar parts of the market, the Group has a low-to-medium risk approach

to such non-member residential lending. The management team is responsible for considering lending portfolios from

both a risk and a commercial viewpoint and is independently overseen by the group credit risk team.

As at 31 July 2009 there were 79,684 BCIG residential mortgages (31 December 2008 : 81,056), with 7 over £1 million

(31 December 2008 : 6).

BCIG’s residential mortgage business consists of:

87 of 120




Britannia Commercial Lending

31 July 31 July 31 December 31 December

2009 2009 2008 2008

£m % £m %

Loans secured on commercial property

retail 858.3 23.3 881.3 23.6

offices 627.6 17.0 627.1 16.9

leisure 256.3 7.0 258.4 6.9

storage and distribution 257.3 7.0 258.9 7.0

other 166.7 4.5 177.3 4.8

2,166.2 58.8 2,203.0 59.2

Loans to Registered Social Landlords (RSLs) 849.1 23.0 844.6 22.7

Loans secured on residential property 670.9 18.2 673.2 18.1

3,686.2 100.0 3,720.8 100.0

Treasury

Britannia Commercial Lending (BCL) is responsible for all commercial lending activities and the management of

commercial lending credit risk.

The Group’s commercial loans are secured on income-producing property; the main risks arise from tenant failure or

high levels of vacancy. The Group has a low risk-appetite for commercial lending credit risk and avoids speculative,

unsecured, owner-occupied and development-type funding. Commercial investment lending is predominantly

undertaken where cash flow is very strong, properties are of a high value and leases are to creditworthy tenants.

BCL underwrites all new loans and monitors existing ones. Higher value loans require approval from the group credit

committee or the Board. The group credit risk team independently monitors policy in respect of commercial credit risk

and compliance with the limits, providing reports to group credit committee on the performance of the commercial

portfolios.

Exposures to the commercial lending market are mitigated by the levels of interest cover on the deals and the range of

high quality tenants and locations. The make-up of the commercial lending book at 31 July 2009 is as follows:

The Group holds treasury assets to manage liquidity risk and interest-rate risk. It invests in a range of financial

instruments, such as government bonds, bank and building society deposits, gilts, floating-rate notes, commercial paper

and certificates of deposit, to provide the greatest flexibility regarding risk and return.

The retail loans are diversified across shopping centres and various single and multiple retail units. As at 31 July 2009

there were 257 (31 December 2008 : 262) commercial investment loans with the risk spread across more than 900

tenants. The largest single borrower represents 4.5% (31 December 2008 : 4.5%) of the total commercial book; 40.6%

(31 December 2008 : 40.6%) of commercial lending is within London and the South East.

Loans to RSLs, ie housing associations, are spread fairly evenly on a geographical basis. In terms of counterparty

concentration, the largest single borrower, including undrawn commitments, represents 2.3% (31 December 2008 :

2.4%) of the total commercial book. As at 31 July 2009 there were 54 (31 December 2008 : 56) RSL loans.

For loans secured on residential property, as at 31 July 2009, there were 67 (31 December 2008 : 70) loans spread

across more than 700 properties (31 December 2008 : 700).

88 of 120





2009 2009 2008 2008

£m % £m %

Group

Cash 591.8 6.4 275.0 2.3

Loans and advances to banks 972.5 10.5 1,789.8 15.1


asset-backed/mortgage-backed securities 2,814.9 30.5 3,095.0 26.2

floating-rate notes 2,367.1 25.6 3,085.0 26.1

certificates of deposit 329.1 3.6 1,756.4 14.9

gilts 1,075.2 11.6 228.8 1.9

equity investments 1.8 - 1.8 -

Derivatives 1,086.6 11.8 1,583.7 13.5

9,239.0 100.0 11,815.5 100.0

The treasury portfolio at 31 July 2009 comprises the cash and balances with the Bank of England, loans and advances to

banks, investment securities and derivatives split into the following sub-portfolios:

The Group has a low risk-appetite for treasury counterparty credit risk, which is managed through the use of credit

limits based on rating grades. Exposures against group treasury limits are monitored daily. Reports on treasury

counterparties are presented to the treasury credit and operations group for detailed review and debate. Internal ratings

are compared with those of external rating agencies and commentaries are provided on any differences. A summary of

these reports is submitted to the monthly meeting of the assets and liabilities committee (ALCO) for challenge and

approval and to the Board for ratification.

The Group is also exposed to credit risk as a result of its use of derivatives and where it has taken on credit-related

commitments such as guarantees and standby facilities. The Group maintains strict limits on the exposure of derivatives

with banks. The credit-risk exposure is managed as part of the overall lending limits. Collateral or other security is not

usually obtained for credit-risk exposures on these instruments, except where the Group requires margin deposits from

counterparties.

On some derivative counterparty transactions, the Group employs netting agreements to allow the reduction of overall

exposure to risk. Netting agreements between lender and borrower where there are asset and liability exposures on both

sides allow exposures to be treated as a net position in the event of a default by either party.

The Group has historically used securitisation to increase the diversification of funding sources available, whilst

mitigating liquidity risk by managing maturity-mismatch risk and also assisting overall credit-risk management. BTS has

twelve years’ experience issuing securitisations in the “Leek” programme, and has built up a depth of knowledge,

processes and management information to deal effectively with these funding vehicles. The Group has used Fitch,

Moody’s and Standard & Poor’s as external credit-assessment institutions on all its outstanding Leek securitisations.

The Group’s appetite for securitisation risk is low, only acting as mortgage originator and servicing agent. The Group

does not provide liquidity facilities, bridging loans or repackaging and does not act as underwriter or dealer in its

securitisations. All transactions have full accounting and legal advice to ensure compliance with regulatory/statutory

rules and are also approved at Board level. Group exposure is restricted to the subordinated loans (and start-up loans

where applicable) provided at the start of each transaction. Such loans are also limited in amount and duration with no

additional recourse to the Group. Protection against exposure to the subordinated loans for Leek 12 - 17 has also been

acquired through a synthetic securitisation, Dovedale Finance Number One plc.

89 of 120





2009 2009 2008 2008

£m % £m %

Society

Cash 591.8 7.1 275.0 2.6

Loans and advances to banks 326.5 3.9 1,289.6 12.2


asset-backed/mortgage-backed securities 2,893.0 34.8 3,094.9 29.2

floating-rate notes 2,367.1 28.5 3,048.0 28.9

certificates of deposit 329.1 4.0 1,751.2 16.5

gilts 1,075.2 12.9 217.3 2.1

equity investments 1.8 - 1.8 -

Derivatives 733.1 8.8 904.6 8.5

8,317.6 100.0 10,582.4 100.0

53. Liquidity risk

For treasury counterparties, individual exposures (under one year) are all capped at £450 million (31 December 2008 :

£450 million). The treasury function uses mostly international counterparties who themselves are well capitalised,

diversified and closely regulated by national supervisors. The Group, therefore, does not require further capital cover for

concentration risks of treasury counterparties. The same approach applies for the holdings of mortgage-backed securities

(MBS) collateralised by pools of UK mortgages, and asset-backed securities (ABS) collateralised by other types of UK

assets such as loans, leases and receivables.

Liquidity risk is the risk of having insufficient liquid assets to fulfil obligations or liabilities as they become due, or the

cost of raising liquid funds is too expensive. The Group has a low liquidity-risk appetite; its policy is to maintain

sufficient liquid resources to cover cashflow imbalances and fluctuations in funding to retain confidence in the solvency

of the Group and to enable the Group to meet its financial obligations.

The Group has never experienced a significant shortage of liquidity. As a result of the credit crunch triggered by

problems in the US sub-prime mortgage market in 2007, a committee of senior managers meets at least weekly to assess

the impact on liquid assets. It has restricted investments to short maturities and reduced credit limits in respect of

counterparties on the Group's watch list.

Treasury assets are held with counterparties to manage liquidity risk and interest-rate risk. The Group invests in a range

of financial instruments to provide the greatest flexibility regarding risk and return. Liquidity ratios are monitored

against Board-approved limits daily.

Historically the Group also used securitisations to increase the diversification of funding sources available, whilst

mitigating liquidity risk by managing maturity-mismatch risk and also assisting overall credit-risk management.

Although the securitisation markets remain closed, on 21 April 2008, the Bank of England launched its Special

Liquidity Scheme (SLS), which allows banks to swap their high quality mortgage-backed and other securities for UK

treasury bills for a defined period. As part of its liquidity management, the Group is using repos and the SLS as a

funding tool to borrow longer term monies in a cost-effective manner. During the 7 month period to 31 July 2009 the

Society launched a £1.4 billion covered bond to enable it to access the SLS scheme.

In response to changing market conditions, daily and weekly market valuations are produced on repoed bonds and swaps

with Credit Support Annexes (CSAs). Margin calls are then exchanged as appropriate.

90 of 120



53. Liquidity risk (continued)

Group

Repayable

on demand

Up to 3

months

3 – 12

months 1 – 5 years

More than 5

years Total

£m £m £m £m £m £m

As at 31 July 2009

Gross contractual cash flows

Shares 10,762.2 1,193.1 3,786.6 1,093.0 6.7 16,841.6

Guaranteed equity bonds 0.1 98.2 227.6 1,207.9 48.5 1,582.3

Deposits from banks - 4,675.1 673.9 315.3 408.0 6,072.3

Other deposits - 1,431.9 182.2 57.7 0.2 1,672.0

Debt securities in issue - 112.5 1,199.1 3,447.0 42.4 4,801.0

Subordinated liabilities - 4.9 17.5 89.7 775.8 887.9

Subscribed capital - 3.9 21.5 101.6 437.1 564.1

Loan commitments 103.2 - - - - 103.2

Derivative financial instruments - 25.3 171.4 277.6 11.7 486.0

As at 31 December 2008


Shares 11,798.2 432.5 4,543.7 656.0 - 17,430.4

Guaranteed equity bonds - 52.6 251.4 1,081.0 70.6 1,455.6

Deposits from banks - 5,657.5 609.4 85.7 572.9 6,925.5

Other deposits - 1,576.6 417.5 70.3 1.8 2,066.2

Debt securities in issue - 666.3 917.3 4,050.4 61.4 5,695.4

Subordinated liabilities - 6.7 22.8 118.0 877.3 1,024.8




The gross undiscounted contractual cash flows payable under the financial liabilities of the Group and Society are

provided below. Customer deposits (shares) are normally repaid later than the earliest date on which a repayment can be

made.

The Group has a contingency funding plan, agreed at Board level and reviewed annually.

As additional support the Group maintains committed standby facilities. As at 31 July 2009, the Group and Society

maintained £26.6 million of committed standby facilities (31 December 2008 : £181.0 million), which are all due to

mature by August 2010 (31 December 2008 : £150.0 million were due to mature within one year). The Group also

maintains standby lines of warehouse finance facilities, which are bank lines secured on mortgage collateral. As at 31

July 2009, the Group and Society maintained £1.1 billion (31 December 2008 : £1.2 billion) of committed warehouse

lines.

The Group has a diversified funding programme, enabling us to place monies in high levels of well rated liquid

investments. While overseas markets have remained illiquid, the Group has funded wholesale maturities through

relationships within the UK market. The high quality investment portfolio has enabled us to access substantial funds

through sale and repurchase agreements, thereby maintaining liquidity levels. Short-term liquidity remains significantly

above the minimum set by the FSA.

91 of 120



53. Liquidity risk (continued)

Society

Repayable

on demand

Up to 3

months

3 – 12

months 1 – 5 years

More than 5

years Total

£m £m £m £m £m £m

As at 31 July 2009


Shares 10,762.2 1,193.1 3,786.6 1,093.0 6.7 16,841.6

Shares - guaranteed equity bonds - 97.5 213.8 1,159.1 47.4 1,517.8

Deposits from banks - 4,598.8 673.1 314.9 - 5,586.8

Other deposits - 288.3 101.1 15.7 - 405.1

Debt securities in issue - 63.7 886.6 783.9 42.4 1,776.6

Subordinated liabilities - 4.9 17.5 89.7 775.8 887.9






Shares 11,798.2 432.5 4,543.7 656.0 - 17,430.4

Shares - guaranteed equity bonds - 50.6 250.0 1,024.7 64.4 1,389.7

Deposits from banks - 5,652.7 609.3 9.9 - 6,271.9

Other deposits - 584.7 215.8 35.0 - 835.5

Debt securities in issue - 626.3 481.1 1,200.2 61.4 2,369.0

Subordinated liabilities - 6.7 22.8 118.0 877.3 1,024.8




Typically, loan commitments may be drawn down at any time during the commitment period which can be one year or

more. As it is not possible to predict when drawdowns will occur, loan commitments have been included in the

‘repayable on demand’ category.

The subscribed capital consists of PIBS, which have no fixed maturity. For the purposes of the above table, it has been

assumed that they will mature in ten years. The subordinated liabilities have also been assumed to have a maturity of ten

years.

It has been assumed that interest will be paid at the applicable rates as at 31 July 2009 and 31 December 2008

respectively.

92 of 120



54. Market risk

Interest-rate risk

Extent of risk

Cashflow sensitivity to

movement in interest rates

Fixed-rate savings products and

fixed-rate funding

Fixed-rate mortgage lending and

fixed-rate investments

Libor rate fixed-term funding

Libor rate fixed-term

investments

Risk Type of hedgeActivity

Management of the investment

of reserves and other net non-

interest bearing liabilities

The Group has never

experienced significant

financial losses as a

result of movements in

interest rates. In order

to avoid any adverse

effects in the future,

effective hedges will

continue to be

maintained.

Sensitivity to changes in

interest rates

Sensitivity to falls in

interest rates

Sensitivity to increases in

interest rates

Interest-rate swaps, fixed-rate

bonds eg gilts, and fixed-rate

mortgages

Receive fixed-interest-rate swaps

Pay fixed-interest-rate swaps

Pay fixed-interest-rate swaps

Receive fixed-interest-rate swaps

Cashflow sensitivity to

movement in interest rates

The following table describes those significant Group activities sensitive to interest rate changes, together with how

such risks are managed, and the extent of risk to the Group. The Group monitors risk daily using a risk management

system and operates within limits set down by ALCO.

Market risk is the risk that the value of, or income or costs arising from, the Group’s assets and liabilities change as a

result of changes in interest rates, exchange rates or FTSE indices. Group treasury is responsible for managing our

exposure to all aspects of market risk within the operational limits set out in the Group’s policies. Oversight is provided

by ALCO, which approves treasury policy and receives regular reports on all aspects of market risk, including interest-

rate risk, foreign-currency risk and equity risk. Group treasury uses derivative instruments to manage various aspects of

market risk.

The Group has a cautious approach to interest-rate risk, arising from the mortgage, savings and other financial services

products that are offered. The varying interest rate features and maturities on these products, and the need to raise

wholesale funds to fund them, create interest-rate risk due to the imperfect matching of interest rates between different

financial instruments and to timing differences on the repricing of assets and liabilities. Management of interest-rate risk

within the Group sits within treasury.

The Group’s preferred method of managing these risks is via repricing gap analysis and the four-book approach,

whereby the assets and liabilities of the balance sheet are identified according to their interest rate attributes and four

books are derived: administered, basis, Libor and fixed. This enables the Group to focus on any structural risk, delivers

transparency of each risk and permits effective management of the Group balance sheet.

In line with Basel guidelines, a +/- 2% stress test has been used. However, in the day-to-day management of the Group

balance sheet, in board reports and in strategic planning, additional stress tests and scenarios are used, including

different interest rate views and changes in customer behaviour arising from different market conditions.

93 of 120



54. Market risk (continued)

Interest-rate risk sensitivity analysis

The interest rate sensitivity analysis is based on the following assumptions:

-

-

-

-

-

-

Foreign-currency-exchange risk

Foreign-exchange risk arises as a result of activities undertaken by the Group when raising and investing funds in

currencies other than sterling, which is done in order to manage wholesale funding costs and the returns on liquid assets

and to provide diversity in funding and investment markets. Currency risk is managed primarily through the use of

currency swaps and forward foreign-exchange contracts. The risk is also managed, where appropriate, by foreign

exchange currency liabilities being matched with assets denominated in the same foreign currency.

The Group has used a sensitivity analysis technique that measures the estimated change to the 31 July 2009 income

statement and the capital balance of the balance sheet of either an instantaneous increase or decrease of 1%, from the

market rates applicable at 31 December 2008, for each class of financial instrument with all other variables remaining

constant. The sensitivity analysis excludes the impact of market risks on net post-employment benefit obligations. This

analysis is for illustrative purposes only, as in practice market rates rarely change in isolation and it is likely that

corrective management action would be taken prior to losses reaching this point.

Under these assumptions, a 1% increase or decrease in market interest rates for all currencies in which the Group had

borrowings and derivatives at 31 December 2008 would have decreased or increased profit before tax in the 7 month

period to 31 July 2009 by approximately £21.5 million and equity by £15.3 million.

the Group's reserves are assumed to have a maturity of 5 1/2 years, being the estimated average life of the mortgage

book; and

repricing is assumed to happen mid-period.

changes in market interest rates affect the interest income or expense of variable-interest financial instruments;

changes in market interest rates only affect interest income or expense in relation to financial instruments with fixed

interest rates if these are recognised at their fair value;

changes in market interest rates affect the fair value of derivatives designated as hedging instruments. All interest-

rate hedges are expected to be highly effective;

changes in the fair values of derivatives and other financial assets and liabilities are estimated by discounting the

future cash flows to net present values using appropriate market rates prevailing at the period end;

94 of 120




£ US$ € CAD AUD Total

Group

As at 31 July 2009

Assets

Cash and balances with the Bank of England 591.8 - - - - 591.8

Loans and advances to banks 939.3 11.1 19.5 1.4 1.2 972.5

Loans and advances to customers 23,646.2 10.3 96.4 - - 23,752.9

Fair-value adjustments for hedged risk 370.2 - - - - 370.2

Investment securities - loans and receivables 2,485.7 718.4 1,519.5 207.8 275.1 5,206.5

Investment securities - available-for-sale 1,381.6 - - - - 1,381.6

Derivative financial instruments 1,086.6 - - - - 1,086.6

Investments in joint ventures 2.1 - - - - 2.1

Goodwill 194.8 - - - - 194.8

Intangible assets 36.4 - - - - 36.4

Investment properties 131.1 - - - - 131.1

Property, plant and equipment 72.6 - - - - 72.6

Deferred tax assets 52.5 - - - - 52.5

Other assets 18.0 - - - - 18.0

Prepayments and accrued income 112.1 - 10.1 - - 122.2

Total assets 31,121.0 739.8 1,645.5 209.2 276.3 33,991.8

Liabilities

Shares 16,631.5 - - - - 16,631.5

Guaranteed equity bonds 1,593.2 - - - - 1,593.2

Deposits from banks 3,234.2 750.2 1,648.1 209.4 275.7 6,117.6

Other deposits 1,678.0 - - - - 1,678.0

Derivative financial instruments 721.1 - - - - 721.1

Debt securities in issue 4,329.4 - - - - 4,329.4


Other liabilities 54.1 - - - - 54.1

Provisions for liabilities and charges 14.2 - - - - 14.2

Accruals and deferred income 207.5 0.1 - 0.2 - 207.8

Current taxes 44.3 - - - - 44.3

Subordinated liabilities 530.9 - - - - 530.9

Subscribed capital 318.7 - - - - 318.7

Total liabilities 29,990.0 750.3 1,648.1 209.6 275.7 32,873.7

General reserve 1,232.5 (10.5) (2.6) (0.4) 0.6 1,219.6

Available-for-sale reserve (88.8) - - - - (88.8)

Cashflow hedging reserve (12.7) - - - - (12.7)

Total equity and liabilities 31,121.0 739.8 1,645.5 209.2 276.3 33,991.8

Net balance sheet position - - - - - -


Total assets 33,300.2 1,055.3 2,308.2 237.0 316.0 37,216.7

Total equity and liabilities 33,312.5 1,054.3 2,295.0 239.9 315.0 37,216.7

Net balance sheet position (12.3) 1.0 13.2 (2.9) 1.0 -

£m equivalent denominated in:

The table below summarises the Group’s exposure to foreign-currency-exchange risk. The table includes the Group and

Society’s assets and liabilities at carrying amounts, categorised by currency. The net balance sheet position represents

the difference between the notional amounts of foreign currency derivatives, which are principally used to reduce the

Group’s exposure to currency movements, and their fair values.

95 of 120




£ US$ € CAD AUD Total

Society

As at 31 July 2009

Assets

Cash and balances with the Bank of England 591.8 - - - - 591.8

Loans and advances to banks 293.3 11.1 19.5 1.4 1.2 326.5

Loan and advances to customers 12,044.3 10.3 96.4 - - 12,151.0


Investment securities - loans and receivables 2,563.8 718.4 1,519.5 207.8 275.1 5,284.6

Investment securities - available-for-sale 1,381.6 - - - - 1,381.6


Investments 70.1 - - - - 70.1

Goodwill 157.9 - - - - 157.9

Intangible assets 33.6 - - - - 33.6

Property, plant and equipment 57.9 - - - - 57.9

Deferred tax assets 22.4 - - - - 22.4

Other assets 11,129.9 - - - - 11,129.9

Prepayments and accrued income 110.5 - 10.1 - - 120.6

Total assets 29,474.8 739.8 1,645.5 209.2 276.3 32,345.6

Liabilities

Shares 16,631.5 - - - - 16,631.5

Shares - guaranteed equity bonds 1,528.5 - - - - 1,528.5

Deposits from banks 2,746.0 750.2 1,648.1 209.4 275.7 5,629.4

Other deposits 405.5 - - - - 405.5


Debt securities in issue 1,723.5 - - - - 1,723.5


Other liabilities 3,544.5 - - - - 3,544.5

Provisions for liabilities and charges 12.9 - - - - 12.9

Accruals and deferred income 173.2 0.1 - 0.2 - 173.5

Current taxes 4.5 - - - - 4.5

Subordinated liabilities 530.9 - - - - 530.9

Subscribed capital 318.7 - - - - 318.7

Total liabilities 28,503.2 750.3 1,648.1 209.6 275.7 31,386.9

General reserve 1,071.8 (10.5) (2.6) (0.4) 0.6 1,058.9

Available-for-sale reserve (88.8) - - - - (88.8)

Cashflow hedging reserve (11.4) - - - - (11.4)

Total equity and liabilities 29,474.8 739.8 1,645.5 209.2 276.3 32,345.6

Net balance sheet position - - - - - -


Total assets 29,236.6 1,055.3 2,308.2 237.0 316.0 33,153.1

Total equity and liabilities 29,248.9 1,054.3 2,295.0 239.9 315.0 33,153.1

Net balance sheet position (12.3) 1.0 13.2 (2.9) 1.0 -

£m equivalent denominated in:

96 of 120




Foreign-currency-exchange risk sensitivity analysis

The Group operates a policy of matching all non-sterling assets with equivalent liabilities, using cross-currency swaps,

in order to remove currency risk from the balance sheet. Any mismatches are negligible in size, with the maximum

amount allowed under Group policy being the equivalent of 2% of ‘own funds’.

Under this assumption, with a 10% strengthening or weakening of sterling against all exchange rates, the maximum that

profit before tax would have decreased or increased by for the 7 month period is £5.5 million (12 months ended 31

December 2008 : £5.6 million) respectively and that equity would have decreased or increased by is £3.9 million (31

December 2008 : £4.0 million) respectively.

Equity risk

Equity risk arises from the guaranteed equity bond products sold and is managed through the use of derivative contracts.

Equity risk is monitored by the treasury risk committee and ALCO. Since all equity exposures are fully hedged, there is

no significant net exposure to equity risk.

Equity risk sensitivity analysis

In its normal course of business, the Group offers retail products whose returns are linked to underlying equity indices.

It is the Group’s policy to hedge these on a one-to-one basis, thus eliminating any exposure to movements in such

indices. Differences in balances between product and hedge are minimal and not considered material.

Retail Price Index (RPI) risk

In its normal course of business, the Group offers retail products whose returns reset each month in line with the RPI.

These products tend to allow access to funds subject to a 90 day notice period.

It is the Group's policy to hedge these retail products on a one-to-one basis, thus eliminating any exposure to movements

in the index. All hedging is done using derivative instruments that pay the Group an RPI-linked return that matches the

underlying product in exchange for it paying three month Libor. Differences in balances between product and hedge are

minimal and not considered material as they are reviewed monthly and adjusted accordingly.

Insurance risk

The Group uses insurance to mitigate credit and operational risks.

Credit risks for most high LTV retail mortgage lending are mitigated through the use of mortgage insurance. This

insurance was provided by Britsafe Insurance Services (Guernsey) Limited until July 2009 when its operations were

transferred to the Society. Currently, the Society is managing the risk through self insurance.

Operational risks are mitigated through insurance for aspects such as fraud, business continuity and professional

indemnities.

Accordingly, insurance risk is defined as the residual risk which may arise because risks are ineffectively insured, action

or inaction by the Group invalidates insurance policies affected or insurers default on pay-out of valid claims through

bankruptcy. The Group has a very low appetite for insurance risk as it is a key mitigant of other risks.

97 of 120



55. Derivative financial instruments and hedging

Types of derivatives

Derivative products which are combinations of more basic derivatives are used only in circumstances where the

underlying position being hedged contains the same risk features. For example, GEBs issued by the Group may be

hedged with a single contract incorporating both the underlying interest-rate and equity-index risk. In such cases the

derivatives used will be designed to match exactly the risks of the underlying asset or liability. Exposure to market risk

on such contracts is therefore fully hedged. As at 31 July 2009 the total market value adjustment for the GEBs issued by

the Group was £10.9 million (31 December 2008 : £24.9 million).

The notional amounts of certain types of financial instruments provide a basis for comparison with instruments

recognised on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current

fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or price risks. The derivative

instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market interest rates or

foreign-exchange rates relative to their terms. The aggregate contractual or notional amount of derivative financial

instruments on hand, the extent to which instruments are favourable or unfavourable, and thus the aggregate fair values

of derivative financial assets and liabilities, can fluctuate significantly from time to time.

The Group has a formal structure for managing risk, including established risk limits, reporting lines, mandates and

other controls. The Board reviews this structure regularly in line with new requirements from regulators. ALCO

monitors compliance and performance against the structure and manages and controls the balance sheet exposures of the

Group.

The Board has authorised the use of derivatives under Section 9a of the Building Societies Act 1986. The FSA agrees an

overall limit on the derivatives outstanding at any one time. The Board sets all other limits over the use of derivative

products on the recommendation of the ALCO.

In addition to making loans and accepting deposits, the Group utilises a range of financial instruments to provide the

greatest flexibility regarding risk and return. Financial instruments constitute the vast majority of the Group and

Society's assets and liabilities. The principal derivatives used in balance sheet risk management are interest-rate swaps,

interest-rate options, cross-currency interest-rate swaps, foreign-exchange contracts and FTSE swaps, which are used to

hedge Group balance sheet exposures arising from fixed-rate mortgage lending and savings products, and funding and

investment activities.

Currency and interest-rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an

economic exchange of currencies or interest rates (eg fixed rate for floating rate) or a combination of these (ie cross-

currency interest-rate swaps). No exchange of principal takes place, except for certain currency swaps. The Group’s

credit risk represents the potential cost to replace the swap contracts if counterparties fail to perform their obligation.

This risk is monitored on an ongoing basis with reference to the current fair value, the notional amount of the contracts

and the liquidity of the market. To control the level of credit risk taken, the Group assesses counterparties using the

same techniques as for its lending activities.

From 1 January 2009, the group has decided to apply the hedge accounting criteria of the "carve out" version of IAS 39

which was adopted by the EU in 2005 when determining the composition of certain portfolios for hedge accounting

purposes. This has been done in order to simplify the procedures required in order to achieve hedge accounting and

more closely align the accounting approach with the Group's economic basis of hedging. The Group's accounting policy

for hedging remains unchanged as a result of this new approach.

98 of 120



55. Derivative financial instruments and hedging (continued)

Fair value hedges

Portfolio hedging

Cashflow hedging

Credit default swap

The Society has hedged part of its credit exposure on subordinated loans made to some of the Group's securitisation

companies, by taking out a credit default swap with another subsidiary, Dovedale Finance Number One plc. The fair

value of the credit default swap at 31 July 2009 was £13.8 million (31 December 2008 : nil). The gain on the credit

default swap in the 7 month period to 31 July 2009 was £13.8 million (12 months ended 31 December 2009 : nil).

The Group adopted cashflow hedging for certain of its variable rate funding and investing activities from 1 November

2006. As a result, movements in fair value are recognised through reserves. At 31 July 2009 interest-rate swaps with an

aggregate principal amount of £4,315.2 million (31 December 2008 : £3,463.8 million) and a net fair value of £22.4

million (31 December 2008 : £(47.0) million) were designated as hedges of future cash flows from variable rate funding.

These amounts will be reported in income in the period from 1 August 2009 to 2014, the cashflows to which they relate

will occur during the same periods. There was a nil (31 December 2008 : nil) charge to income and expenditure in

respect of hedging ineffectiveness during the period.

The Group hedges part of its existing interest-rate risk resulting from any potential decrease in the fair value of fixed-

rate assets or increase in fair value of term deposits from customers using interest-rate swaps. The net fair value of these

swaps at 31 July 2009 was £(238.8) million (31 December 2008 : £(392.5) million). The gains on the hedging

instruments in the 7 month period to 31 July 2009 were £153.7 million (12 months ended 31 December 2008 : losses

£476.4 million). The losses on the hedged item attributable to the hedged risk for the 7 month period were £122.8

million (12 months ended 31 December 2008 : gains £505.4 million).

The Group also hedges a proportion of its existing foreign-exchange risk in its financial assets and financial liabilities

by fair value hedges in the form of cross-currency swaps. The net fair value of the Group’s cross-currency swaps at 31

July 2009 was £642.4 million (31 December 2008 : £1,290.9 million). Further details are given in Note 27. The losses

on the hedging instruments in the 7 month period to 31 July 2009 were £648.5 million (12 months ended 31 December

2008 : gains £1,271.5 million). The gains on the hedged item attributable to the hedged risk for the 7 month period were

£648.5 million (12 months ended 31 December 2008 : losses £1,271.5 million).

As part of its risk management process the Group identifies a portfolio of items whose interest-rate risk it wishes to

hedge. The portfolio may comprise only assets, only liabilities or both assets and liabilities. Any hedging ineffectiveness

within these portfolios will be recognised in the income and expenditure account. The net fair value of the swaps within

these portfolios at 31 July 2009 was £(11.8) million (31 December 2008 : £3.1 million).

99 of 120



56. Fair values of financial instruments

Category

(as defined by

IAS 39)


2009 2008 2009 2008

£m £m £m £m

Group

Loans and advances

to banks 972.5 1,789.8 972.5 1,789.8

Member Business 10,716.4 10,897.9 10,821.5 11,085.1

Commercial 3,686.2 3,720.9 3,775.3 3,809.9


5,206.5 6,133.6 4,716.5 5,467.6

Shares 16,631.5 17,300.6 16,646.7 17,339.1

Deposits from banks 6,117.6 6,936.8 6,117.6 6,957.3

Other deposits 1,678.0 2,057.8 1,679.2 2,071.5

Debt securities in issue 4,329.4 5,233.5 3,214.9 6,579.4

Subordinated liabilities 530.9 691.7 459.8 624.1

Subscribed capital 318.7 326.5 346.2 372.5

BCIG residential

mortgages

Class


Carrying value Fair value

9,350.3 9,629.8 9,374.7 9,656.7

Loans and advances

to customers

The following table summarises the carrying amounts and fair values of those financial assets and liabilities not

presented on the Group and Society balance sheets at fair value.

Financial assets


Financial

liabilities at

amortised cost

Loans and

receivables

100 of 120



56. Fair values of financial instruments (continued)


2009 2008 2009 2008

£m £m £m £m

Loans and advances

to banks 326.5 1,289.6 326.5 1,289.6

Member Business 10,716.4 10,908.2 10,821.5 11,095.4

Commercial 1,434.6 1,440.4 1,468.8 1,483.6


5,284.6 6,133.6 4,794.6 5,467.6

Shares 16,631.5 17,300.6 16,646.7 17,339.1

Deposits from banks 5,629.4 6,282.8 5,629.4 6,303.3

Other deposits 405.5 828.2 406.5 832.6

Debt securities in issue 1,723.5 2,294.3 1,724.6 2,366.3

Subordinated liabilities 530.9 691.7 459.8 624.1

Subscribed capital 318.7 326.5 346.2 372.5

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

a.

b.

c.

d.

The fair values are calculated based on quoted market prices in an active market. For those notes where quoted

market prices are not available, a discounted cash flow model is used based on a current yield curve appropriate for

the remaining term to maturity.

Loans and advances to banks include inter-bank placements and items in the course of collection. The fair value of

floating-rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed-interest

bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with

similar credit risk and remaining maturity.

Loans and advances to customers are net of provisions for impairment. The estimated fair value of loans and

advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash

flows are discounted at current market rates to determine fair value.

Included within the carrying values of financial liabilities are fair-value adjustments for hedged risk that are disclosed in

the relevant notes to the financial statements.




Deposits and borrowings

The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the

amount repayable on demand. The estimated fair value of fixed-interest deposits and other borrowings without

quoted market prices is based on discounted cash flows using interest rates for new debts with similar remaining

maturity.

Loans and advances

to customers

Financial

liabilities at

amortised cost

Carrying value

Loans and

receivables

Financial assets


Fair value

Category

(as defined by

IAS 39)

Society

Class


101 of 120




The levels are as follows:

Level Fair value based upon

Level 1 Unadjusted quoted prices in an active market for identical financial instruments

Level 2

Level 3 Inputs are not based on observable market data

Group

31 July

2009 Level 1 Level 2 Level 3

£m £m £m £m

Financial assets


- listed 1,079.2 1,079.2 - -

- unlisted 302.4 - 302.4 -

Total available-for-sale financial assets 1,381.6 1,079.2 302.4 -

Interest rate swaps

- designated as fair value hedges 269.4 - 269.4 -

- designated as cash flow hedges 162.3 - 162.3 -

- at fair value through income & expense 33.5 - 33.5 -

Cross currency interest rate swaps


Total derivative financial instruments 1,086.6 - 1,086.6 -

Total assets 2,468.2 1,079.2 1,389.0 -


1,593.2 - 1,593.2

Interest rate swaps





- designated as fair value hedges (21.0) - (21.0) -

Total derivative financial instruments 721.1 - 721.1 -

Total liabilities 2,314.3 - 2,314.3 -

Category

(as defined by IAS

39)

Class


Derivative financial

instruments

The following table summarises the financial assets and liabilities which are presented on the Group and

Society balance sheets at fair value based on level 1, 2 and 3.

Inputs other than those in level 1, that are observable either directly (ie prices) or

indirectly (ie derived from prices)

Financial liabilities at

amortised cost

Fair value measurement at end of the

reporting period using:

Available-for-sale

financial assets


instruments

Guaranteed equity bonds

102 of 120




Society

31 July

2009 Level 1 Level 2 Level 3

£m £m £m £m

Financial assets


- listed 1,079.2 1,079.2 - -

- unlisted 302.4 - 302.4 -

Total available-for-sale financial assets 1,381.6 1,079.2 302.4 -

Interest rate swaps






13.8 - 13.8 -


Total assets 2,114.7 1,079.2 1,035.5 -


1,528.5 - 1,528.5 -

Interest rate swaps





- designated as fair value hedges (21.0) - (21.0) -


Total liabilities 2,142.1 - 2,142.1 -

Category

(as defined by IAS

39)

Class



instruments

Fair value measurement at end of the

reporting period using:

Available-for-sale

financial assets


instruments

Financial liabilities at

amortised cost Guaranteed equity bonds

Credit default swap

- at fair value through income & expense

103 of 120



57. Operational risk

58. Capital management

31 July 31 December

2009 2008

£m £m

Subordinated liabilities 530.9 691.7

Subscribed capital 318.7 326.5

General reserves 1,219.6 1,203.5

Available-for-sale reserve (88.8) (97.4)

Cashflow hedging reserve (12.7) (33.6)

1,967.7 2,090.7

Operational risk is the risk of loss arising from poor or failed processes or systems, human error or external events. The

Group’s approach requires a culture of risk awareness that supports the organisation’s strategy. The Board requires all

operational risks of the business to be identified, assessed and mitigated to appropriate residual levels. Senior managers

are responsible for understanding how operational risk impacts on their business areas and for putting in place

appropriate controls or other mitigating actions.

The Group’s operational risk management policy is approved by the Board through the group audit committee, which

receives a quarterly report on the Group’s operational risk profile.

The Group operates a ‘three lines of defence’ model, with operational risks managed within business areas. A central

group operational risk department provides the operational risk management framework and consistency across the

Group. Oversight of the framework is the responsibility of the business risk committee which reports to the group

executive board and group audit committee.

The Group considers the Basel II standardised approach for operational risk to be appropriate to its size, complexity and

risk exposure. The Group identifies and assesses significant risks within its business areas on a quarterly basis, and

makes an assessment of the level of capital required by the Group for operational risk. Each of these risks is allocated an

owner, all of whom are members of the group executive board.

The Group’s objectives when managing capital are to ensure appropriate levels of capital to safeguard the Group’s

ability to continue as a going concern and to maintain a strong capital base to support development of the business.

Capital adequacy and the use of regulatory capital are monitored daily using techniques based on the guidelines

developed by the Basel Committee (Basel II) and the European Union Directives, as implemented by the FSA for

supervisory purposes.

The Group is subject to the Basel II capital requirements, which comprise Pillar I (requirements for regulatory capital

for credit, operational and market risk), Pillar II (other risks) and Pillar III (disclosure). The assumptions used in the

calculations are very prudent, and are intended to ensure that the Group has sufficient capital to remain a going concern

even in a severe market downturn. During the period the Group complied with all the externally imposed capital

requirements to which it is subject and maintained capital above the minimum threshold required by the regulators.

The table below summarises the composition of the Group's capital at 31 July 2009 and 31 December 2008:

During the period, the Group recognised that there was an opportunity to buy-back a proportion of its subordinated

liabilities on favourable terms. The Group bought back £99.5 million of subordinated liabilities with the approval of the

FSA, after a detailed review of the impact of the transaction on regulatory capital.

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59. Cash flows from operating activities


7 months

ended

12 months

ended

7 months

ended

12 months

ended


2009 2008 2009 2008

£m £m £m £m

Profit before tax 24.8 5.4 62.4 2.4

Income from investments - - (50.4) (28.0)

Decrease in prepayments and accrued income 40.8 113.1 39.8 114.3

Decrease in accruals and deferred income (357.0) (24.0) (325.9) (12.0)

Impairment losses 42.3 115.2 (8.2) 67.1

Loans and advances written off, net of recoveries (49.5) (27.4) (0.7) (0.7)

Amortisation 8.5 16.5 7.6 15.2

Depreciation 7.8 13.6 6.2 12.2

Interest on subscribed capital 13.1 28.9 13.1 28.9

Interest on subordinated liabilities 12.0 35.8 12.0 35.8

Profit on sale of property, plant and equipment (0.3) (3.6) (0.3) (3.6)

Profit on buy back of liabilities (57.9) - (36.5) -

(Decrease)/increase in provisions for liabilities and

charges (10.1) 16.4 (10.0) 16.5

Movements in derivative financial instruments 550.9 (810.2) 250.8 (234.2)

Movements in fair-value adjustment for hedged risk (525.4) 813.4 (234.7) 257.5

Movements in retirement benefit plan (2.8) (33.0) (2.8) (33.0)

(302.8) 260.1 (277.6) 238.4

Net decrease in loans and advances to customers 499.9 1,201.0 203.5 379.8

Net (decrease)/increase in shares (280.8) 1,065.8 (280.8) 1,065.8

Net increase in guaranteed equity bonds 126.7 120.6 128.1 124.0

Net (decrease)/increase in deposits from banks (780.3) 1,847.5 (615.0) 2,025.0

Net decrease in other deposits (337.2) (1,440.9) (411.6) (1,128.6)

Net decrease in debt securities in issue (860.7) (2,724.2) (557.4) (1,723.5)

Net decrease/(increase) in loans and advances to banks 307.8 (980.8) 459.9 (496.7)

Net decrease/(increase) in value of joint ventures 0.1 (0.6) - -

Net increase in other assets (7.3) (2.6) (1,805.0) (841.4)

Net (decrease)/increase in other liabilities (1.8) (26.2) 1,589.0 (460.2)

Taxation received/(paid) 3.6 13.7 (2.4) 42.9

Net cash flows from operating activities (1,632.8) (666.6) (1,569.3) (774.5)

Cash flows from operating profits before changes in

operating assets and liabilities

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59. Cash flows from operating activities (continued)

Cash and cash equivalents



2009 2008 2009 2008

£m £m £m £m

Cash and balances with the Bank of England (Note 17) 569.1 253.0 569.1 253.0

Loans and advances to banks (Note 18) 293.8 798.2 287.4 785.5

Investment securities 442.6 1,951.1 442.6 1,942.3

1,305.5 3,002.3 1,299.1 2,980.8

60. Related party transactions

Parent, subsidiary and ultimate controlling party

Transactions with directors and their close family members

Group Group

31 July 31 December

2009 2008

£000 £000

At beginning of period 1,213 2,369

Loans issued during the period - 167

Loan repayments during the period (58) (1,323)

At end of period 1,155 1,213

Interest income paid by directors and their close family

members 11 46

Loans made to directors and members of their close families are on the same terms and conditions applicable to other

employees within the Group.

For the purposes of the cashflow statement, cash and cash equivalents comprise the following balances with less than 90

days maturity from date of acquisition.

Loans outstanding to directors and their close family

members

Cash equivalents comprise balances of highly liquid investments with a maturity of three months or less from the date of

acquisition. As a result, certain loans and advances to banks and investment securities are included as cash equivalents.

The Group is controlled by Britannia Building Society. Further details of subsidiary undertakings and joint ventures are

disclosed in Note 28 of these financial statements.

Directors and their close family members have entered into the following transactions with the Group and the Society in

the normal course of business:

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60. Related party transactions (continued)

Transactions with Group companies

The Society undertook the following transactions with Group companies during the period:


Interest

paid to

Society

Interest

received

from Society

Staff

recharges

paid to

Society

Rent

received

from Society

£m £m £m £m

Britannia Treasury Services Limited 0.4 - - -

Britannia Development and Management Company Limited - - - 0.4

Britannia Asset Management Limited - 0.3 - -

Mortgage Agency Services Number One Limited 19.5 - 0.1 -

Mortgage Agency Services Number Two Limited 0.6 - - -

Mortgage Agency Services Number Four Limited 1.6 - 0.1 -

Mortgage Agency Services Number Five Limited 3.9 - 0.6 -

Mortgage Agency Services Number Six Limited 0.1 - - -

Platform Group Holdings Limited 37.4 - - -

Britannia International Limited - 23.5 -

Britannia Life Direct Limited - 0.6 - -

Illius Properties Limited 0.5 - - -

Britannia Covered Bonds LLP 8.1 - - -


Britannia Treasury Services Limited 3.1 - - -

Britannia Development and Management Company Limited - 0.1 - 0.6

Britannia Asset Management Limited - 2.6 - -

Mortgage Agency Services Number One Limited 137.2 - 0.1 -

Mortgage Agency Services Number Two Limited 2.2 - - -

Mortgage Agency Services Number Four Limited 20.3 - 0.2 -

Mortgage Agency Services Number Five Limited 91.9 - 1.0 -

Mortgage Agency Services Number Six Limited 0.6 - 0.1 -

Platform Group Holdings Limited 143.8 - - -

Britannia International Limited - 91.9 - -

Britannia Life Direct Limited - 4.6 - -

Illius Properties Limited 0.4 - 0.2 -

Britsafe Insurance Services (Guernsey) Limited 0.2 - - -

Interest accrues on outstanding balances at a transfer-price rate agreed between the Society and its subsidiaries.

During the 12 month period to 31 December 2008 the Society sold £0.7 million of residential properties to Illius

Properties Limited. No properties were sold by the Society to Illius Properties Limited during the 7 month period to 31

July 2009.

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At the period end the following unsecured balances were outstanding:

Loans owed

by Society

Loans owed

to Society

Loans owed

by Society

Loans owed to

Society


2009 2009 2008 2008

£m £m £m £m

Britannia Treasury Services Limited - 49.4 - 53.8

Britannia Development and Management Company

Limited 1.9 - 1.6 -

Britannia Asset Management Limited 40.8 - 40.5 -

Mortgage Agency Services Number One Limited - 2,378.8 - 2,497.9

Mortgage Agency Services Number Two Limited - 67.7 - 73.0

Mortgage Agency Services Number Four Limited - 193.5 - 204.2

Mortgage Agency Services Number Five Limited - 460.8 - 492.1

Mortgage Agency Services Number Six Limited - 11.2 - 11.1

Mortgage Agency Services Number Seven Limited 0.3 - 0.3 -

Platform Group Holdings Limited - 1,638.4 - 1,998.7

Britannia International Limited 1,383.6 - 1,354.1 -

Britannia Life Direct Limited 83.0 - 75.2 -

Britannia New Homes Limited 0.1 - 0.1 -

Britannia Independent Limited 0.9 - 0.9 -

Britannia Lending Company Limited - - 0.1 -

Britannia Building Society Land and Development

Company (Midlands) Limited - - 0.9 -

The Mortgage Agency plc 0.1 - 0.1 -

Verso Limited 0.2 - 0.2 -

Britannia Shield Property Services Limited - 0.2 - 0.2

Britannia Estate Agents Limited - 0.1 - 0.1

Western Mortgage Services Limited - 0.1 - 3.0

Illius Properties Limited - 110.9 - 48.9

Britannia Personal Lending Limited - - - 0.2

Britannia Covered Bonds LLP 1,799.5 1,849.3 - -

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Transactions with special purpose entities

Britannia Building Society undertook the following transactions with special purpose entities during the period:

Interest paid

to Society

Interest

received from

Society

Interest paid

to Society

Interest

received from

Society

7 months

ended

7 months

ended

12 months

ended

12 months

ended


2009 2009 2008 2008

£m £m £m £m

Leek Finance Number Ten plc - - - 0.1

Leek Finance Number Eleven plc - - 0.4 0.4

Leek Finance Number Twelve plc 0.2 - 0.8 0.6

Leek Finance Number Fourteen plc 0.6 - 1.7 1.1

Leek Finance Number Fifteen plc 0.7 - 1.9 1.7

Leek Finance Number Sixteen plc 0.5 - 1.5 2.0

Leek Finance Number Seventeen plc 0.8 - 2.3 2.5

Leek Finance Number Eighteen plc 0.8 - 2.3 2.4

Leek Finance Number Nineteen plc 0.8 - 2.2 1.3

Leek Finance Number Twenty plc 32.5 - 65.7 0.1

Leek Finance Number Twenty One plc 22.2 - 23.8 0.1

Leek Finance Number Twenty Two plc 7.7 - - -

Meerbrook Finance Number One Limited 0.8 0.4 1.6 1.0

Meerbrook Finance Number Two Limited - - 4.7 3.3

Meerbrook Finance Number Three Limited 0.8 0.4 3.1 2.2

Meerbrook Finance Number Four Limited 5.8 2.3 11.0 3.9

Meerbrook Finance Number Six Limited 0.2 - - -

Dovedale Finance Number One plc - 0.7 - 5.2

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At the period end the following balances were outstanding with special purpose entities:

Loans owed

by Society

Loans owed

to Society

Loans owed

by Society

Loans owed to

Society


2009 2009 2008 2008

£m £m £m £m

Leek Finance Number One plc 0.1 - 0.6 -

Leek Finance Number Two plc 0.2 - 0.2 -

Leek Finance Number Five Limited - - 0.1 -

Leek Finance Number Six Limited 0.2 - 0.3 -

Leek Finance Number Seven plc 0.1 - 0.1 -

Leek Finance Number Eight Limited - - 0.6 -

Leek Finance Number Nine Limited - - 0.1 -

Leek Finance Number Ten plc 0.1 - 0.6 -

Leek Finance Number Eleven plc - - 3.4 -

Leek Finance Number Twelve plc 6.2 - 2.7 9.4

Leek Finance Number Fourteen plc 2.9 17.7 2.4 17.6

Leek Finance Number Fifteen plc 2.5 19.1 2.5 19.0

Leek Finance Number Sixteen plc 2.6 14.9 2.5 14.8

Leek Finance Number Seventeen plc 3.3 46.1 2.9 23.7

Leek Finance Number Eighteen plc 2.9 42.8 2.5 27.0

Leek Finance Number Nineteen plc 3.0 88.1 2.4 25.6

Leek Finance Number Twenty plc 3.4 1,919.3 2.6 1,963.9

Leek Finance Number Twenty One plc 1.8 1,310.5 3.2 1,355.7

Leek Finance Number Twenty Two plc 1.9 525.8 - -

Meerbrook Finance Number One Limited 31.0 41.5 34.2 41.5

Meerbrook Finance Number Two Limited 0.4 1.3 0.3 1.3

Meerbrook Finance Number Three Limited 3.3 10.2 38.6 44.5

Meerbrook Finance Number Four Limited 124.7 405.9 237.2 373.7

Meerbrook Finance Number Five Limited - 1.0 0.1 1.0

Meerbrook Finance Number Six Limited - 12.1 2.4 15.8

Dovedale Finance Number One plc - - 88.0 -

The loans owed to the special purpose entities comprise cash balances deposited with the Society.

61. Events after the balance sheet date

Britannia Treasury Services Limited is the parent undertaking of Platform Group Holdings Limited, Mortgage Agency

Services Number One to Seven Limited and Western Mortgage Services Limited.

On 21 January 2009 the Group announced the proposed merger with The Co-operative Financial Services. The proposal

was approved by the members at the Annual General Meeting on 29 April 2009. The merger took place with effect from

1 August 2009. Costs associated with the merger are disclosed in Note 9.

The directors consider that there has been no other event since the period end that has a significant effect on the

Society’s position or that of any of its connected undertakings at the period end.

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62. Registered office

Britannia Building Society

Britannia House

Cheadle Road

Leek

Staffordshire Moorlands

ST13 5RG

Britannia Building Society was a mutual organisation, incorporated and domiciled in the United Kingdom. The address

of its registered office was:

111 of 120

Annual business statement 1. Statutory percentages

2009 Statutory

limit % % Proportion of business assets not in the form of loans fully secured on residential property (the lending limit)

17.0

25.0

Proportion of shares and borrowings not in the form of shares held by individuals (the funding limit)

35.0

50.0

The above percentages have been calculated in accordance with, and the statutory limits are those

prescribed by, sections 6 and 7 of the Building Societies Act 1986 as amended by the Building Societies Act

1997:

• business assets are the total assets of the Group as shown in the balance sheet, plus provisions for

impairment losses on loans and advances, less fixed assets and liquid assets;

• loans fully secured on residential property are the amount of principal owing by borrowers and interest

accrued not yet payable. This is the amount shown in the balance sheet, plus provisions for bad debts,

less unamortised premiums on the acquisition of loans; and

• shares and borrowings represent the total of shares, amounts owed to credit institutions, amounts owed

to other customers and debt securities in issue.

2. Other percentages

2009

2008 % % As a percentage of shares and borrowings gross capital 7.0 6.9 free capital 5.5 5.5 liquid assets 29.2 33.5

Profit after taxation as a percentage of mean total assets 0.09 0.01

Management expenses as a percentage of mean total assets (statutory ratio)

0.73

0.70

Management expenses (excluding merger costs, impairment losses on counterparties and compensation scheme levies) as a percentage of mean total assets under management

0.64

0.62

The above percentages have been prepared from the Society’s consolidated accounts and in particular:

• gross capital represents the aggregate of general reserve, subordinated liabilities and subscribed capital;

• free capital represents the aggregate of gross capital and general loss provisions for bad and doubtful

debts, less tangible and intangible fixed assets;

112 of 120

• liquid assets represent the total of cash and balances with the Bank of England, loans and advances to

credit institutions and debt securities;

• mean total assets represent the amount produced by halving the aggregate of total assets at the

beginning and end of the financial period;

• management expenses represent the aggregate of administrative expenses, depreciation and

amortisation; and

• total assets under management include assets managed by the Group on behalf of third parties.

113 of 120

3. Directors’ responsibilities DIRECTORS Name and date of birth Business occupation and other directorships Date of

appointment as a director of the Society

Rodney Baker-Bates, MA, FCA, AIMC, FCIB 25.4.1944

Chartered accountant Assura Group plc Bedlam Asset Management plc Dolphin Square Trust Limited EG Solutions plc G’s Group Holdings Limited Stobart Group plc The Burdett Trust for Nursing Limited

19.7.2006

Keith Cameron, BSc 31.3.1947

Company director Barclays Pension Funds Trustees Limited Global Air Charter Limited Nickleby & Co. Limited TACT UK Limited Work Group Plc

1.8.2007

Tim Franklin, ACIB 24.9.1961

Building society executive director Britannia International Limited MutualPlus Limited

22.3.2005

Francis Gugen, FCA 26.2.1949

Company director CEOC Limited Chrysaor Holdings Limited Echo Petroleum Limited Fraudscreen Limited Gugen Consulting Limited Island Gas Limited Island Gas Resources Plc KP Renewables (Operations) Limited Petroleum Geo-Services ASA Raft Enterprises Limited Raft Trustees Limited

17.12.2003

See note in directors’ report on page 5. Peter Harvey, ACIB, Dip FS 11.11.1955

Company director and consultant Marshalls Holdings Limited Surrey Cricket Club Limited

1.10.2008

114 of 120

Chris Jones, LLB 23.2.1953

Solicitor and company director Agenda Management Services Limited CJM Pudsey Limited Illius Properties Limited The Business Desk Limited Armitage Jones LLP LPA Direct LLP Tourmalet Consulting Trango Limited

7.5.2003

Stephen Kingsley, FCA 1.6.1952

Chartered accountant Highfield Resources Limited

1.10.2008

Phil Lee, BSc, CA 25.5.1955

Building society executive director Britannia Asset Management Limited Britannia Building Society Land and Development Company (Midlands) Limited Britannia Development and Management Company Limited Britannia Independent Limited Britannia Lending Company Limited Britannia New Homes Limited Britannia Treasury Services Limited Mortgage Agency Services No. 1 Limited Mortgage Agency Services No. 2 Limited Mortgage Agency Services No. 4 Limited Mortgage Agency Services No. 5 Limited Mortgage Agency Services No. 6 Limited Mortgage Agency Services No. 7 Limited PCSL Services No. 1 Limited PCSL Services No. 2 Limited Platform Consumer Services Limited Platform Funding Limited Platform Funding No. 2 Limited Platform Funding No. 3 Limited Platform Funding No. 4 Limited Platform Funding No. 5 Limited Platform Funding No. 6 Limited Platform Group Holdings Limited Platform Home Loans Limited Verso Limited Western Mortgage Services Limited

1.9.2002

115 of 120

David McCarthy, BSc, ACA, AMCT 20.5.1965

Building society executive director Britannia Asset Management Limited Britannia Building Society Land and Development Company (Midlands) Limited Britannia Development and Management Company Limited Britannia Estate Agents Limited Britannia Estate Agents (London) Limited Britannia Independent Limited Britannia (Isle of Man) Limited Britannia LAS Direct Limited Britannia Lending Company Limited Britannia Life Direct Limited Britannia Motor Insurance Services Limited Britannia New Homes Limited Britannia Shield Property Services Limited Britannia Treasury Services Limited Findprior Limited Meridian Financial Consultants Limited Mortgage Agency Services No. 1 Limited Mortgage Agency Services No. 2 Limited Mortgage Agency Services No. 4 Limited Mortgage Agency Services No. 5 Limited Mortgage Agency Services No. 6 Limited Mortgage Agency Services No. 7 Limited PCSL Services No. 1 Limited PCSL Services No. 2 Limited Platform Consumer Services Limited Platform Funding Limited Platform Funding No. 2 Limited Platform Funding No. 3 Limited Platform Funding No. 4 Limited Platform Funding No. 5 Limited Platform Funding No. 6 Limited Platform Group Holdings Limited Platform Home Loans Limited Plum Sterling No. 1 plc The Mortgage Agency plc Verso Limited Western Mortgage Services Limited

18.6.2008

Neville Richardson, BA, FCA 2.6.1957

Building society executive director Communicate Mutuality Limited Trustee of the Britannia Building Society Foundation

28.9.1998

Bridget Rosewell, MA, MPhil 19.9.1951

Economist The Environment Business Limited Volterra Consulting Limited

28.7.1999

116 of 120

Tom Sawyer 12.5.1943

Member of the House of Lords Management and training consultant Chancellor of the University of Teesside Key Homes Norfolk Lift Limited Thompsons Solicitors Union Income Benefit

28.7.1999

Documents may be served on the above-named directors at the following address: Howsons, 50 Broad Street, Leek, Staffordshire Moorlands, ST13 5NS.

117 of 120

OFFICERS Business occupation and other directorship

Peter Ambrose Business leader, strategic loss management unit

Mark Beresford, BA Managing director, Britannia International Limited

Ian Dale, ACA Director of operations, Britannia Capital Investment Group Britsafe Insurance Services (Guernsey) Limited Verso Limited Western Mortgage Services Limited

Karen Darby Strategy manager, customer way Martin Ellison, BA, MA Business leader, group strategy and planning Basil Foulkes, BCom, ACA, FCIS

Strategy manager, risk capital unit

Louise Fowler, BA, MBA Business leader, marketing

Mike Gannon Business leader, group arrears

Phil Garlick, ACIB, BA Business leader, membership services

Steve Goldstraw Managing director, Britannia Commercial Lending Britannia New Homes (Scotland) Limited Illius Properties Limited Walstat Limited

Ian Graham

Strategy manager, group financial crime and group money laundering reporting officer

Philip Hewetson, BSc, ACA Business leader, financial management

Illius Properties Limited

Mark Jacot, BSc, CEng, MIMechE

Business leader, information services

Stephen Jones, MA (Oxon), ACIB, FiSMM

Business leader, distribution Britannia Personal Lending Limited Britannia International Limited

118 of 120

Jon Katovsky, BA, MA Managing director, Britannia Treasury Services Limited Mortgage Agency Services No. 1 Limited Mortgage Agency Services No. 2 Limited Mortgage Agency Services No. 4 Limited Mortgage Agency Services No. 5 Limited Mortgage Agency Services No. 6 Limited Mortgage Agency Services No. 7 Limited Platform Funding Limited Platform Home Loans Limited Western Mortgage Services Limited

Graham Leftwich, BSc, MA Business leader, group communications

Trustee of the Britannia Building Society Foundation

Mike Lewis Managing director, Western Mortgage Services Limited

Britannia Treasury Services Limited Mortgage Agency Services No. 1 Limited Mortgage Agency Services No. 2 Limited Mortgage Agency Services No. 4 Limited Mortgage Agency Services No. 5 Limited Mortgage Agency Services No. 6 Limited Mortgage Agency Services No. 7 Limited Platform Funding Limited Platform Home Loans Limited

Peter Mansfield, BA, MA, FCIPD

Business leader, affinity and group property Britannia Personal Lending Limited

Paul Mills, BSc, ACA Group director of corporate governance and group secretary

Britannia Asset Management Limited Britannia Building Society Land and Development Company (Midlands) Limited Britannia International Limited Britannia (Isle of Man) Limited Britannia Life Direct Limited Britannia Motor Insurance Services Limited Britannia New Homes Limited PCSL Services No. 1 Limited PCSL Services No. 2 Limited Platform Consumer Services Limited Platform Funding No. 2 Limited Platform Funding No. 3 Limited Platform Funding No. 6 Limited Platform Group Holdings Limited Trustee of the Britannia Building Society Pension Plan

Karen Moir, BA Director of organisational development Will Newby, MBA, ACII Business leader, regulatory and operational risk

119 of 120

Steve Nichols, ACIB, MCT, ACIS

Business leader, treasury Trustee of the Britannia Building Society Pension Plan

Neil Noakes Business leader, group human resources Adrian Powell, BA, MSc Business leader, leadership and people development Adrian Smith Business leader, strategy and planning (Member Business)

and Bristol CSC operations Manor Farm Winterbourne Bassett Limited MutualPlus Limited

Alison Thompson Business leader, change management David Tweedy, BA, MBA Managing director, Platform Home Loans Limited

Britannia Treasury Services Limited Mortgage Agency Services No. 1 Limited Mortgage Agency Services No. 2 Limited Mortgage Agency Services No. 4 Limited Mortgage Agency Services No. 5 Limited Mortgage Agency Services No. 6 Limited Mortgage Agency Services No. 7 Limited PCSL Services No. 1 Limited PCSL Services No. 2 Limited Platform Consumer Services Limited Platform Funding Limited Western Mortgage Services Limited

Lorna Whiston, BSc, ACA Strategy manager, internal audit

4. Directors’ service contracts The following directors have service contracts with the Society, entered into on the dates stated below: Tim Franklin 1 February 2005 Phil Lee 1 February 2005 David McCarthy 18 June 2008 Neville Richardson 1 March 2005 All executive director appointments (including promotions) have a rolling one-year contract of employment.

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