COMIN 3955577 Bank of Scotland (Ireland) Limited Directors’ report and consolidated financial statements ‘Year ended 31 December 2009 Registered number: 8545 C.R.O. 16 JUN 2010 Cettified to be a true copy of the original DirectorBank of Scotland (Ireland) Limited Directors’ report and Group financial statements Contents Directors and other information Directors” report Risk management review Statement of Directors’ responsibilities Independent auditor's report Accounting policies Consolidated Income Statement Consolidated Statement of Comprehensive Income Balance Sheet Statement of Changes in Equity Cash Flow Statements Notes to the financial statements Page 16-17 18-30 31 31 32 33 34-35 36-74Bank of Scotland (Ireland) Limited Directors’ report ‘The Directors submit the report and audited financial statements of Bank of Scotland (Ireland) Limited, (the ‘Company’), together with its subsidiaries, (the ‘Bank’), for the year ended 31 December 2009. Principal activities ‘The Bank has an established presence in the corporate and commercial banking, intermediary mortgage and asset finance markets operating under the Bank of Scotland (Ireland) brand. Throughout 2009 the Bank also ‘operated in the retail banking market under the Halifax brand via a network of 44 branches nationwide and a service centre in Dundalk. On 9 February 2010, the Bank announced that it was to close both the Halifax retail business in the Republic of Ireland and the Bank of Scotland (Ireland) intermediary business, and to refocus the Bank on its established strengths and long standing heritage in corporate and commercial banking, ‘The Bank is part of the Lloyds Banking Group ple (‘LBG") which was formed following the Lloyds TSB Group ple acquisition of HBOS ple on 19 January 2009. Following the completion of the takeover, LBG. became the Bank’s ultimate parent. The Bank is part of the Wealth & International division (‘W&I’) of LBG. Business review In 2009, the Bank faced a very challenging operating environment due to the severe downturn in the Irish economy, the collapse in both the commercial and residential property markets and ongoing stress in wholesale funding markets, This has lead to a significant deterioration in credit quality and the recognition of substantial impairment provisions. Since the formation of LBG, the Bank has been working to align the Bank’s risk control framework with LBG policies and procedures. This has included a revision to the credit risk appetite to reduce our sector concentration in property and to focus on developing our customer relationships. In order to effectively manage impaired loans, and in line with the LBG approach, a Business Support Unit (BSU") was established during the year. This complements the corporate and commercial banking businesses and is responsible for working with customers who are most affected by current market conditions. BSU utilises the shared knowledge and experience from across LBG. Its aim is to understand the specific issues faced in impaired cases and to work with customers to achieve a positive outcome. During the year, the Bank has undertaken reviews of its collections and debt recovery capability across all businesses in order to enhance its arrears management techniques and to optimise performance. Financial performance The Bank’ financial performance is presented in the Consolidated Income Statement and Balance Sheet on pages 31 and 32. ‘The underlying loss before tax increased to €2,965m (2008: €212m) reflecting the recognition of significantly higher impairment charges of €3,286m (2008: €552m) against loans and advances to customers. Operating profit before impairment declined by 3% to €370m (2008: €383m) as a result of higher funding ‘costs and a decline in non interest income, offset by a modest reduction in operating expenses.Bank of Scotland (Ireland) Limited Directors’ report Financial performance (continued) ‘Assets and deposits Gross loans and advances to customers have remained stable at €32.7bn (2008: €32.6bn) with limited new business being written reflecting lower market demand and very low levels of roll-off on the portfolio caused bya lack of liquidity in the market place, particularly for property assets Deposits to customers fell by 40% to €4.0bn (2008: €6,6bn) as the Bank decided to source funding from other parts of LBG rather than to match the uneconomic pricing of competitors, covered by the Irish Government deposit guarantee scheme. Operating income Net interest income decreased by 1% to €560m (2008: €566m). This reflects the impact of higher funding costs which the Bank has been unable to recover from customers. Non interest income declined by 29% to €24m (2008: €34m), reflecting lower levels of contingent fees and the impact of ineffective hedges caused by higher levels of arrears and impairments on the fixed component of the loan portfolio. Operating expenses Operating expenses have reduced by 1% to €214m (2008: €217m) reflecting tighter cost control offset by an inerease in depreciation and amortisation costs as a result of a shortening of the useful economic life of certain assets in order to align with LBG policy. The cost:income ratio has increased slightly to 36.6% (2008: 36.2%). Impairmes ‘The severe property market downtum in Ireland coupled with the absence of sector liquidity and recessionary pressures in the economy in general have resulted in an unprecedented increase in the impairments in the period Impairment charges increased to €3,286m (2008: €552m), representing 10.1%, (2008: 1.8%) of average loans and advances to customers. Impaired loans as a percentage of closing loans and advances to customers, increased to 33.3% (2008: 7.9%). Impairment coverage, which is defined as balance sheet provisions as a percentage of impaired loans, increased to 36.7% (2008: 27.4%), and portfolio coverage which is defined as Balance sheet provisions as @ percentage of gross closing loans and advances to customers, increased to 12.2% (2008: 2.2%). ‘The distressed economic environment is now affecting all asset classes with the most severe impact ‘occurring in the property sector caused by a lack of liquidity in the market and a collapse in residential and ‘commercial property prices, which have fallen from peak by 31% and $5% respectively. ‘The Bank’s commercial real estate (‘CRE’) portfolio, consisting of property development and property investment assets, deteriorated very significantly over the course of 2009. At31 December 2009, provisions (of €2,379m had been recorded against this portfolio. This provides impairment coverage of 34.8% (2008: 32.8%) and portfolio coverage of 18.1% against CRE assets (2008: 3.3%). “The severe economic conditions have also affected the corporate and commercial (‘Commercial’) portfolio consisting of trading businesses, high net worth lending along with motor and commercial asset finance. At 31 December 2009, €1,371m of provisions had been recorded against this portfolio (2008: €270m). This provides impairment coverage of 39.9% against impaired loans (2008: 23.7%) and portfolio coverage of 12.8% against Commercial assets (2008: 2.4%). 3Bank of Scotland (Ireland) Limited Directors’ report Financial performance (continued) Higher unemployment and a reduction in disposable income have increased arrears and, along with a sharp decline in residential property values, has impacted the residential mortgages portfolio. At 31 December 2009, €236m of provisions had been recorded against this portfolio (2008: €25m), which reflects impairment coverage of 39.7% against impaired loans (2008: 13.7%) and portfolio coverage of 2.7% against residential mortgage assets (2008: 0.3%). ‘An impairment charge of €23m was recognised in respect of the carrying value of investment securities due to the write-down of equity positions in property related companies and funds (2008; €39m). ‘The Bank has taken a full write-down of €24m in respect of the carrying value of the goodwill asset created on the Bank's acquisition of Smurfit Finance Ltd in 1999. This is consistent with the Bank’s decision to close its intermediary asset finance business. Post-balance sheet events and future developments. On 9 February 2010, the Bank announced its intention to close both the Halifax retail business in the Republic of Ireland and the Bank of Scotland (Ireland) intermediary business. The resulting closure of 44 Halifax retail branches and the majority of the associated job losses are planned to take place by the end of July 2010. The continuing business will focus on its established strengths and long standing heritage in corporate and commercial banking. ‘The Bank's decision followed the completion of a strategic review, which concluded in early February 2010. [At the balance sheet date, a number of strategic options were being pursued. However, subsequent events resulted in only one outcome remaining viable, The retail and intermediary businesses accounted for €396m Of the Bank's overall loss for the year ended 31 December 2009. It is not possible to estimate the cost of exiting these businesses given the proximity to the announcement, Capital and dividends During 2009, the Bank received capital injections totalling €2.7bn, details of which are set out in note 26 of the financial statements. 'At31 December 2009, the Bank’s total capital ratio was 17.8% (2008: 9.8%) and the tier I ratio was 13.3% (2008: 7.5%). The Bank remained in compliance with the minimum capital ratios set by the Financial Regulator at all times throughout the year. “The Directors do not recommend the payment of a dividend (2008: Nil)Bank of Scotland (Ireland) Limited Directors’ report Directors ‘The following changes in Board membership occurred during the financial year: ‘Appointed M. Duffy j Sir R. Garrick : J. Higgins 4 March 2009 C. Matthew : R. McDonnell : H. McKay 19 January 2009 M. Wooderson 19 January 2009, Resigned 31 March 2009 16 January 2009 16 January 2009 31 July 2009 In accordance with the Articles of Association, the Directors are not required to retire by rotation. Interests of Directors and Secretary During the year, the shares of the Bank’s previous ultimate parent, HBOS ple, were acquired by Lloyds TSB Group ple (since renamed LBG). ‘The following are the details of the interests of the Directors and Secretary, who held office at 31 December 2008, in the Bank or its ultimate parent LBG, declarable under Section 63 of the Companies Act, 1990. Interest at 31 December 2009 LBG ple Ordinary shares of GBPEO.10 Director Shares Options J. Higgins 63,516 744,898 H. MeKay 58375 613,118 D. MeRedmond 4 : M. Pratt 21,965 : M. Quinn 18,761 - M. Wooderson 280,976 1,386,323, Secretary L.Flyan 2434 : *0r date of eppointment if ater Interest at 31 December 2008* HBOS ple** Ordinary shares of GBPE0.25 Shares Options 49,953 18,512 18,747 - 9338 : 7,980 : 92,551 30,213, 3,442 1,006 ** All shares and options were converted o LBG shares and options at 0.60Sp per share in 2008. ‘Audit Committee Members: ‘M. Quinn (Chairman) Sit R. Garrick (resigned 16 January 2009) C. Matthew (resigned 16 January 2009) H.McKay (appointed 19 January 2009) D. McRedmond M. Wooderson (appointed 19 January 2009)Bank of Scotland (Ireland) Limited Directors’ report Audit Committee (continued) “The Audit Committee met five times during the year ended 31 December 2009, “The Audit Committee approves the Internal Audit work programme each year. It also receives reports on Various aspects of the control framework, reviews the Bank’s financial statements, determines whether proper books of account have been maintained in accordance with the Companies Acts and ensures that no Fistictions are placed on the scope of the statutory audit or on the independence of the Internal Audit function. ‘The Audit Committee has unrestricted access to both the LBG Group Audit function and to the extemal ‘auditor, The Chairman meets privately with the extemal auditor at least once each year. ‘Subsidiary undertakings and jointly controlled entities Details of the principal subsidiary undertakings and jointly controlled entities are set out in notes 14 and 15 of the financial statements. Accounting records ‘The Directors believe they have complied with the requirements of Section 202 of the Companies Act, 1990 with regard to the books of account by employing accounting personnel with appropriate expertise and by providing adequate resources tothe financial function, ‘The books of account of the Bank are maintained at Bank of Scotland House, 124-127 St. Stephen's Green, Dublin 2. Branches outside the State ‘The Bank has a branch, within the meaning of Council Directive 89/666/EEC, in Northern Ireland, Going concern The Bank is part of LBG and receives ongoing capital, funding and liquidity resources, which, coupled with other sources of funding, enable the Bank to meet its obligations as they fall due “The Bank has received confirmation from LBG that it will ensure that Bank of Scotland (Ireland) Limited, as ‘a wholly-owned subsidiary of LBG, will have access to adequate resources to continue to trade and meet liabilities as they fall due for the foreseeable future, Based on the ongoing support of LBG together with the Bank’s own business and funding plans, the Directors are satisfied that the Bank has adequate resources to continue in business for the foreseeable future and accordingly, the financial statements have been prepared on a going concern basis. Charitable donations ‘The Bank made charitable donations during the year amounting to €0.3m (2008: €0.5m),Bank of Scotland (Ireland) Limited Directors’ report Independent auditor KPMG ‘resigned as auditors on 27 February 2009 following the Lloyds acquisition at which point PricewaterhouseCoopers was appointed as auditor. In accordance with Section 160(2) of the Companies Act 1963, the auditor, PricewaterhouseCoopers, Chartered Accountants, will continue in office, On behalf of the Board A yt ‘ oe : he CES pa ee ee 26 February 2010Bank of Scotland (Ireland) Limited Risk management review INTRODUCTION Identification, measurement and management of risk are strategic priorities for the Bank. ‘The Board of Directors, (the “Board’) in conjunction with the relevant committees have established a comprehensive framework covering accountability, oversight, measurement and reporting to maintain high standards of risk ‘management throughout the Bank. ‘The principal risks facing the Bank are: «Credit risk -the risk of financial loss from a customer's failure to meet obligations as they fall due. + Market risk - the potential loss in value or earnings arising from changes in external market factors such as interest rates, foreign exchange rates, commodities and equities. = Funding and liquidity risk - the risk that the Bank cannot meet its financial obligations when they are due * Operational and regulatory risk ~ the risk of financial loss arising from inadequate or failed internal processes, people and systems or from extemal events. » Capital Risk - the risk that the Bank has insufficient capital resources to meet the regulatory minimum requirements, to finance growth or to support its credit rating, Since the formation of LBG, we have been working to align the Bank's risk control framework with LBG policies and procedures. This has included a revision to the credit risk appetite to reduce our sector ‘concentration in property and to focus on developing our customer relationships. (GOVERNANCE “The Board is responsible for setting the risk appetite and does so through an iterative process that aims to censure that the Bank’s approved Business Plan is consistent with the Board's appetite for risk. The strategy for managing risk is formulated by the Executive Committee and is informed through planning and key performance indicators including regular financial and business performance reporting of variances against plan. ‘The Executive Committee provides support to the Chief Executive Officer in relation to strategy and matters having Bank-wide implications. The Executive Committee also takes the lead role in preparing the Bank’s Business Plan, for approval by the Board, and reviews all issues and papers requiring Board or Audit ‘Committee approval. ‘The Board has overall responsibility for the Bank’s system of control and approval of principal risk policies ‘and standards. The Board is also responsible for reviewing the effectiveness of the systems and controls ‘THE RISK MANAGEMENT FRAMEWORK Risk management is undertaken within an overall framework and strategy established by the Board, EMI vwanncemenr | Se RS Secmise | Reames risk | | NATREK Function ~ Centralised Policy management cus ee RISK + LBG Internal Audit Peed ASSURANCE + Audit Committee eeeBank of Scotland (Ireland) Limited Risk management review ‘THE RISK MANAGEMENT FRAMEWORK (continued) Each of the Bank’s business areas has primary responsibility for identifying and evaluating significant risks to the business and for designing and operating suitable controls. Internal and external risks are assessed including economic factors, control breakdowns, disruption of information systems, competition and regulatory requirements. The three Executive Risk Committees are Credit Risk Committee (CRC), Asset and Liability Committee ALCO’) and Operational and Regulatory Risk Committee (ORRC’). These committees are responsible for developing the policies and parameters within which management is required to manage risk. The Committees provide central oversight by reviewing and challenging the work of management and considering the application of appropriate risk management techniques. “The Bank’s Risk function, reporting to the Head of Risk, supports these committees. Its responsibilities are: + to recommend policies, standards and limits; © to monitor compliance with those policies, standards and limits; ‘© to provide leadership in the development and implementation of risk management techniques; and © toaggregate risks arising across the business and to monitor the overall Bank position. Consideration of capital is the responsibility of the Capital Management Committee (‘CMC’). This ‘committee is chaired by the Chief Financial Officer and operates under delegated authority from the Board, In judging the effectiveness of the Bank’s control environment, the Board reviews the reports of the Audit Committee and management. Certain responsibilities are delegated to the Audit Committee, including assuring that there is regular review of the adequacy and efficiency of internal control procedures. This role provides independent and objective assurance that there is an appropriate control structure throughout the Bank ‘The Audit Committee also obtains assurance about the intemal controt and risk management environment through regular reports from executive management. This is complimented by LBG Risk and LBG Group ‘Audit functions which conduct themed risk and control reviews across LBG and report their findings as they apply to the Bank to the Audit Committee, The Audit Committee also considers the reports of the external auditors. MANAGEMENT OF KEY RISKS Credit risk (audited) ‘The severe downturn in the Irish economy and the collapse in property markets have led to a significant deterioration in credit quality and the recognition of substantial impairment provisions. This has been ‘exacerbated by the Bank’s exposure concentration within property and its related sectors. ‘The Bank credit risk profile is susceptible to further impairments until the Irish economy recovers from the current recession and property markets stabilise.Bank of Scotland (Ireland) Limited Risk management review Credit risk (continued) ‘The CRC is chaired by the Head of Risk and comprises senior management from across the business, Credit Risk and Finance divisions, along with representatives from W&l and LBG Risk functions, The CRC assists the Board in formulating the Bank’s credit risk appetite by product and by sector. It recommends the Credit Risk Policy Statement to be applied across all businesses for approval by the Board on an annual basis. It meets monthly and reviews the Bank’s lending portfolio. It also plays an important role in the review and approval of the credit models within the Bank and in recommending credit standards and credit risk policies to the Board. Credit Risk Management (‘CRM’), a specialist support team within the Risk function, provides centralised expertise in the area of credit risk measurement and management techniques. In addition to reporting on the performance of each of the businesses portfolios to the CRC, CRM exercises independent oversight over the Effectiveness of credit risk management arrangements and adherence to approved policies, standards and limits. It is also responsible for credit risk model development and governance. Due to the continued deterioration in economic conditions the Bank has undertaken a number of initiatives to further enhance risk management and minimise potential loss: = Re-alignment of BOSI risk appetite policy with that of LBG risk appetite; * Creation of a Business Support Unit ("BSU’) within the Risk function. This complements the corporate and commercial banking businesses and is responsible for working with customers who fare most affected by current market conditions. BSU utilises the shared knowledge and experience from across LBG, and its aim is to understand the specific issues faced in impaired cases and to work with customers to achieve a positive outcome; and = Reviews of collection and debt recovery capability across all our businesses in order to optimise processes and to enhance our arrears management capability and performance, CRM also liaises closely with the business divisions who have increased their focus on early arrears and are actively managing them by contacting the client when they go into default. This has had a positive effect in the managing of non BSU cases. “To mitigate credit risk, a wide range of policies and techniques are used across the Bank: 2 'For Retail and Intermediary portfolios use is made, where it is practical to do so, of software technology in eredit scoring new applications. In addition, behavioural scoring is used where practical to provide an assessment of the conduct of a customer's account. Affordability is an important measure and is reviewed in combination with application and/or behavioural scores. Collections activity for Retail is centralised for most products with software systems used to prioritise action. + For Commercial and Corporate banking portfolios, a full independent credit assessment of the financial strength of each potential transaction and/or customer is undertaken. An internal risk rating is allocated to each customer and ratings are reviewed regularly. + For the Bank’s investment securities portfolio, a full credit analysis is undertaken and an internal rating is derived, based on detailed knowledge and understanding of the assets and issuers, which helps to establish a credit appetite forthe asst or issuer intended to be acquired. Credit approval is a key pre-deal requirement and post sanction surveillance is actively undertaken,Bank of Scotland (Ireland) Limited Risk management review Credit risk (continued) ‘The Treasury function is mandated to maintain a high quality investment securities portfolio. ALCO, in conjunction with LBG Wholesale Credit Committee is responsible for approving the rules governing the types of assets that can be held together withthe limits controling the maximum maturity of assets, Standatds have been established across the Bank for the management of credit risk, with all divisions Committed to continuously improving credit risk management, There has been a significant level of jnvestment in the development of eredit risk rating tools, portfolio risk measurement systems and the overall jovernance framework supporting the Bank’s status as an Advanced Bank under the Basel Il Accord. This framework includes principles for the development, validation and performance monitoring of credit risk tnodels. Approval for use of a credit model is dependent upon materiality, with all models impacting the regulatory capital calculation requiring assessment by the CRC and approval by LBG Credit Risk Committee Internal reporting has expanded in response to the introduction of improved rating tools. Senior management ‘across the Bank can assess the risk profile in terms of probability of default and expected loss as required of ‘an ‘Advanced Bank’ within the Basel II framework. ‘Market risk (audited) Market risk is defined as the potential oss in value or earnings arising from: ‘= changes in extemal market factors such as interest rates (interest rate sisk), foreign exchange rates (foreign exchange risk), credit spread, commodities and equities (price risk); and ++ the potential for customers to act in a manner which is inconsistent with business, pricing and hedging assumptions, “The objectives of the Bank's market risk framework are to ensure that: ‘= market risk is taken only in accordance with the Bank’s appetite for such risk; + such risk is within the Bank’s financial capability, management understanding and staff competence; = the Bank complies with all regulatory requirements relating to the taking of market risk; and the quality of the Bank’s profits is appropriately managed and its reputation safeguarded, Risk appetite is set by the Board, which allocates responsibility for oversight and management of market risk to ALCO, which is chaired by the Chief Financial Officer and includes representatives from Wé&l and LBG Finance and Risk Functions. “The Bank seeks to ensure that market risk is comprehensively captured, accurately modelled and reported, and effectively managed, Detailed market risk framework documents and limit structures have been developed. ‘These are tailored othe specific market risk characteristics and business objectives of the Bank. ‘The Bank does not take any propriety trading, and as a consequence does not have a trading book. Interest rate risk ‘A key market risk faced by the Bank is interest rate risk. This arises where the Bank’s financial assets and liabilities have interest rates set under different bases, or which reset at different times. Interest rate risk arising in the course of business is managed by the Treasury function, through the use of daily limits, with separate limits in place by currency and maturity bucket. A market risk team provides independent oversight.Bank of Scotland (Ireland) Limited Risk management review Market risk (continued) Interest rate risk (continued) ‘The residual risk held by the Bank is primarily related either to behavioural characteristics or to basis risk arising from imperfect correlations in the adjustment of rates earned and paid on different instruments with ‘therwise similar characteristics, A limit structure exists to ensure that risks stemming, from residual and temporary positions remain within the Bank's expressed risk appetite. Market risk is further controlled across the Bank through the use of the following methodologies, which seck to minimise the potential volatility of net interest income in adverse market conditions: 2 Net interest income sensitivity - This methodology comprises an analysis of the Bank's current interest rate risk position overlaid with behavioural assessment and re-pricing assumptions of planned future activity. The change to forecast net interest income is calculated with reference to a set of defined parallel interest rate shocks. Market value sensitivity — This methodology considers all re-pricing mismatches in the current Balance Sheet including those beyond the time horizon of the net interest income measure. It is also calculated with reference to a set of defined parallel interest rate shocks. Included in note 31 of the financial statements is an analysis of the Bank’s sensitivities as at 31 December 2009 to an immediate up and down 25 basis points change to all interest rates. Foreign exchange risk ‘ALCO manages foreign currency exposures based on forecast currency information and mandates Treasury to execute transactions and undertake currency programmes to manage currency risk. The actual residual risk position is monitored monthly by ALCO. Included in note 31 of the financial statements is an analysis of the Balance Sheet by currency. Other market risks (unaudited) Market risk also arises from the Bank's defined benefit pensions obligations and price risks. Sensitivities in regard to the Bank’s defined benefit pensions obligations are reported to the CMC on a half yearly basis Further information in relation to these sensitivities is included in note 7 of the financial statements, BOS! manages price risk by hedging its exposure to commodity and equity market risk with BOS ple. Funding and liquidity risk (audited) Funding and liquidity risk is the risk that the Bank does not have sufficient financial resources to meet its obligations when they fall due or would have to do s0 at excessive cost. Additionally liquidity risk can arise from mismatches in the timing of cash flows relating to assets, liabilities and off-balance sheet instruments, such as commitments and guarantees. ‘ALCO has responsibility for managing funding and liquidity in accordance with the Board-approved Funding and Business Plans and applicable regulatory requirements. The Bank's Funding Plan is designed to censure that there is adequate contingency funding in place. “The Bank’s Liquidity Policy Statement (‘LPS’) governs liquidity risk. This policy, which is approved by the Board, defines the core principles for identifying, measuring, managing and monitoring liquidity risk across the Bank. Detailed liquidity risk framework documents, limit structures and reporting are in place to reflect Irish regulatory requirements. The Board reviews the LPS at least annually to ensure its continued relevance to the Bank's current and planned operations. 2Bank of Scotland (Ireland) Limited Risk management review Funding and liquidity risk (continued) ‘The Board delegates to ALCO the responsibility for oversight and management of liquidity risk and this includes the setting of specific limits and guidelines for monitoring and controlling liquidity. Operational liquidity is managed on a daily basis by the Treasury function subject to appropriate oversight from the Risk function. ‘The Bank’s internal approach to liquidity risk management, which complements the Financial Regulator’s framework, adopts a cash flow mismatch/liquidity management approach across different time horizons, addressing all currencies and undrawn commitments. Daily monitoring and control processes are in place 10 ‘address both risk management and prudential liquidity requirements. In addition to day-to-day limits, the liquidity framework has two other important components Firstly, the Bank ‘stress tests’ ils potential cash flow mismatch position under various scenarios on an ongoing basis, with formal ALCO and LBG reporting monthly. Scenarios are based on varying degrees of stress and cover both name specific and systemic difficulties. A trigger level has been set for the Bank’s one ‘month net liquidity gap under these scenarios, at which level the Bank’s liquidity position would be reviewed to determine whether any action is required. The scenarios and the assumptions are reviewed annually to gain assurance that they continue to be relevant to the nature of the business, ‘This review is presented to ‘ALCO and noted to the Board. Secondly, the Bank has a Liquidity Contingency Plan embedded within the LPS which has been designed to identify emerging liquidity concems at an early stage, so that action can be taken. This is done through the use of Early Warning Indicators (‘EWI’s), examples include: + Difficulties in meeting oF maintaining statutory and prudential limits and targets; + Difficulties in maintaining the appropriate balance of short and medium term funding, as set out inthe rolling five year plan Status against EWls are reported to ALCO and relevant LBG committees monthly, with clear guidelines in place setting out the management escalation process in the event of EWls triggering and the actions to be {aken (short and medium term) should such an event occur. Included in note 32 of the financial statements is a maturity analysis of the contractual principal and interest cash flows of the Bank’s financial liabilities Operational and regulatory risk (unaudited) (Operational risk exists in the normal conduct of business and isthe risk of loss resulting from inadequate or failed internal processes or systems or from people-related or external events. Operational risk is therefore a broad canvas of individual risk types which include fraud, system failure, human error, failure of key suppliers, breach of IT security, business continuity, change management, operational outsourcing and failure to comply with legistation or regulation The Operational and Regulatory Risk Committee (‘ORC’), which is chaired by the Head of Risk has approved an Operational Risk Policy that establishes the framework for managing operational risk. The ‘main components of the framework include risk and control assessment, internal loss reporting, capture of risk event information, key risk indicator monitoring and evaluation of external events.Bank of Scotland (Ireland) Limited Risk management review Operational and regulatory risk (continued) The primary objective of ORCC is to provide timely, pertinent operational risk information to the appropriate management level to enable appropriate corrective action to be taken and to resolve material incidents, Which have already occurred. ORCC also recommends the appropriate capital requirement for ‘operational risk, and approves appropriate operational risk policies and standards for the Bank. Capital management (unaudited) ‘The Capital Requirements Directive, which implements Basel Il framework in the EU, came into force on 1 January 2008. Under the Basel II framework, each banking group is required to maintain adequate capital resourees to meet minimum capital requirements (Pillar 1) for credit, market and operational risk and ‘additional capital requirements (Pillar 2) for other risks not adequately captured under Pillar 1. Capital Fequirements for Pillar 2 risks are identified through an Intemal Capital Adequacy Assessment Process CICAAP?), The Bank is approved by the Financial Regulator to use the Advanced Internal Ratings Based approach (CAIRB") for regulatory capital purposes. The scope of permission covers all Basel Il asset classes, with capital requirements for certain asset classes derived on an advanced basis. For the remaining asset classes, the Bank has a model roll-out programme that will continue throughout 2010. Capital management is a discipline fully integrated into the Bank’s and LBG's forecasting and stress vesting process. Capital forecasting is performed on a continuous basis, the Capital Plan is updated formally as part PF the annual planning, and quarterly forecasting cycles in line with the Business Plan, with additional revisions made in the intervening periods as necessary. The Financial Regulator supervises the Bank on a regulatory consolidated basis and sets minimum capital requirements for the overall Bank. Compliance with this policy is monitored on a regular basis and reported to CMC monthly and externally to the Financial Regulator on a quarterly basis.Bank of Scotland (Ireland) Limited Statement of Directors’ responsibilities The Directors are responsible for preparing the Directors’ report, Risk management review and the financial statements, in accordance with International Financial Reporting Standards (‘IFRS*) adopted by the European Union (‘EU’) and with those parts of the Companies Acts, 1963 to 2009 applicable to companies reporting under IFRS, Article 4 of the IAS Regulation and the European Communities (Credit Institution Accounts) Regulations, 1992. Irish company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Bank and the Company and the profit or loss of the Bank for the period. In preparing these financial statements, the Directors are required to ‘© select suitable accounting policies and then apply them consistently; make judgments and estimates that are reasonable and prudent; state thatthe financial statements comply with IFRS adopted by the EU; and prepare the financial statements on the going concem basis unless it is inappropriate to presume that the Bank and the Company will continue in business. ‘The Directors confirm that they have complied with the above requirements in preparing the financial statements, ‘The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time, the financial position of the Bank and the Company, and enable them to ensure that the financial statements are prepared in accordance with IFRS endorsed by the European Union and with those parts of the Companies Acts, 1963 to 2009 applicable to companies reporting under IFRS, Article 4 of the IAS Regulation and the European Communities (Credit Institutions: Accounts) Regulations, 1992. They are also responsible for safeguarding the assets of the Bank and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. On behalf of the Board ee M. Prt M. Quinn Hikgins L. yoy Chairman Director Director Sedret 26 February 2010 1sPRICEWATERHOUSE(COPERS PricewaterhouseCoopers (One Spence Dock Non Wall Quay Dublin elo LD. Box No. 137 Telephone +353 (0) 17926000 Fasimle #353 (0) 1 792.6200 vespwe come INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF BANK OF SCOTLAND (IRELAND) LIMITED We have audited the Bank and Company financial statements (the “financial statements") of Bank. ‘of Scotland (Ireland) Limited for the year ended 31 December 2009 which comprise the Consolidated Bank Income Statement, the Bank and Company Balance Sheets, the Bank and Company Cash Flow Statements, the Bank and Company Statements of Comprehensive Income ‘and Change in Shareholders’ Equity and the related notes. These financial statements have been prepared under the accounting policies set out therein. Respective responsibilities of directors and auditors. ‘The directors’ responsibilities for preparing the Annual Report and the financial statements, in ‘accordance with applicable Irish law and International Financial Reporting Standards (IFRSs) as ‘Adopted by the European Union are set out in the Statement of Directors’ Responsibilities. ‘Our responsibilty is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the company’s members as a body in ‘accordance with Section 198 of the Companies Act, 1990 and for no other purpose. We do not, in ‘giving this opinion, accept or assume responsibilty for any other purpose or to any other person to ‘whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing, We report to you our opinion as to whether the financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, and whether the financial statements have been properly prepared in accordance with Irish statute comprising the Companies Acts, 1963 to 2009, Article 4 of the IAS Regulation and the European Communities (Credit Instututions: Accounts) Regulations, 1992. We state whether we have obtained all the information and ‘explanations we consider necessary for the purposes of our audit, and whether the parent ‘company financial statements are in agreement with the books of account. We also report to you (our opinion as to: ‘+ whether the company has kept proper books of account; whether the directors’ report is consistent withthe financial statements; and + whether at the balance sheet date there existed a financial situation which may require the ‘company to convene an extraordinary general meeting of the company; such a financial situation may exist if the net assets of the company, as stated in the company balance sheet, are not more than half ofits called-up share capital We also report to you if, in our opinion, any information specitied by law regarding directors’ remuneration and directors’ transactions is not disclosed and, where practicable, include such information in our report. We read the other information contained in the Annual Report and consider whether itis consistent with the audited financial statements. The other information comprises only the Directors’ Report ‘and the Risk Management Review. We consider the implications for our report if we become. ‘aware of any apparent misstatements or material inconsistencies with the financial statements, (Our responsibilities do not extend to any ather information. 16PRICEWATERHOUSE(COPERS Basis of audit opinion We conducted our audit in accordance with Interational Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial stalements, and of whether the accounting policies are appropriate to the Bank’s and company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion: + the Bank financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Bank's affairs as at 31 December 2009 and of its loss and cash flows for the year then ended; ‘+ the Company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, as applied in accordance with the provisions of the Companies Acts 1963 to 2009 of the state of the Bank's affairs as at 31 December 2009 land cash flows for the year then ended; and + the Bank and Company financial statements have been property prepared in accordance with the Companies Acts, 1963 to 2009, Article 4 of the IAS Regulation and the European Communities (Credit instututions: Accounts) Regulations, 1992, We have obtained all the information and explanations which we consider necessary for the purposes of our audi. In our opinion proper books of account have been kept by the Company. ‘The Company financial statements are in agreement with the books of account. In our opinion the information given in the directors’ report is consistent with the financial statements. The net assets of the Company, as stated in the Company balance sheet are more than half of the ‘amount ofits called-up share capital and, in our opinion, on that basis there did not exist at 31 December 2009 a financial situation which under Section 40 (1) of the Companies (Amendment) Act, 1983 would require the convening of an extraordinary general meeting of the company. Ricentidrone Coogee PricewaterhouseCoopers Chartered Accountants and Registered Auditors. Dublin 26 February 2010 7Bank of Scotland (Ireland) Limited Accounting policies Statement of compliance ‘The consolidated financial statements set out on pages 31 to 74 have been prepared in accordance with IFRS. as issued by the International Accounting Standards Board (“IASB”) as adopted by the EU. The standards ‘applied by the Bank are those endorsed by the EU and effective at the Balance Sheet date 31 December 2009. The financial statements, also comply with the relevant provisions of the Companies Acts, 1963 to 2009, and the European Communities (Credit Institution: Accounts) Regulations, 1992. ‘The parent company’s financial statements have been prepared in accordance with IFRS as issued by the IASB and adopted by the EU, and in accordance with Irish statute. In publishing the parent company’s financial statements together with the Bank's financial statements, the Company has taken advantage of the ‘exemption in $148(8) of the Companies Act 1963 and has therefore not presented an individual Income Statement and related notes as part of these financial statements, Accounting convention ‘The consolidated financial statements for the Bank have been prepared under the historical cost basis, except that the following assets and liabilities are stated at their fair values; derivatives, financial instruments held for trading, financial instruments designated at fair value through the Income Statement, financial instruments classified as available for sale and investment properties. Recognised financial assets and financial liabilities in fair value hedges are adjusted for changes in fair value in respect of the risk that is, hedged. Basis of consolidation “The Bank’s financial statements include the results of the Company and its subsidiary undertakings, together «with the Bank's interests in jointly controlled entities. Jointly controlled entities are accounted for using the equity method. The results of subsidiaries acquired are included in the Bank Income Statement from the date of acquisition. ‘The financial statements of entities controlled by the Bank are consolidated in the Bank’s financial statements commencing on the date control is obtained until the date control ceases. Control exists where the Bank has the power, directly or indirectly, to govern the financial and operating policies of such entities ‘$0 a5 to obtain benefits from their activities. In assessing control, potential voting rights that currently are exercisable or convertible are taken into account. ‘All intra-group transactions, balances, income and expenses with the exception of jointly controlled entities ‘and associates? results, are eliminated on consolidation Investment in subs Investments in subsidiaries comprise equity investments and capital contributions and are included in the Company's financial statements, at cost less impairment provisions. Subsidiaries and special purpose entities are entities controlled by the Bank, Control is defined where the Bank has power, directly or indirectly, to govern the financial and operating policies of such entities so as to obtain benefit from these activities. The financial statements of such entities are consolidated within the Bank financial statements until the date control ceases, ‘At each reporting date an assessment is undertaken to determine if there is any indication of impairment. ‘This assessment can include reviewing factors such as the solvency, profitability and cash flows generated by the subsidiary. If there is an indication of impairment, an estimate of the recoverable amount is made. If the carrying value exceeds the recoverable amount then’a provision for impairment is made to reduce the carrying value to the recoverable amount.Bank of Scotland (Ireland) Limited Accounting policies Associates and jointly controlled entities ‘Associates are entities where the Bank has significant influence, but not control, over the financial and operating policies of the entities. Significant influence is the power to participate in the financial and ‘operating policy decisions of the entity, but is not control over those policies. The Bank has rebutted the presumption of significant influence where the equity shareholding is greater than 20% as the Bank does not have the ability to exercise significant influence over the investment due to the concentrations of other equity shareholdings, The Bank has availed of the exemption in AS 28 ‘Investments in Associates’, paragraph 1 for Venture Capital Organisations for equity investments in associates, which upon initial recognition are designated at fair value through the Income Statement. Jointly controlled entities are entities over which the Bank has joint control under a contractual arrangement with other parties. ‘The Bank's share of results of associates and jointly controlled entities, generally based on audited financial statements to the extent they are available, are included in the Bank financial statements using the equity method of accounting, The share of any losses is restricted to a level that reflects an obligation to fund such losses. Categories of financial instruments ‘The Bank has categorised its financial instruments in accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’ as follows: + Non-derivative financial assets where there is no active market and which have fixed or determinable payments are categorised as “loans and receivables’. + Derivative instruments are categorised as ‘at fair value through the Income Statement’, + Instruments that are ‘designated at fair value through the Income Statement’ on initial recognition in order to eliminate a measurement mismatch or where they contain an embedded derivative which is not separated from the host contract and which significantly modifies cash flows. + No financial assets are designated as *held to maturity’ + Allother financial assets are classified as ‘available for sale" = Allother financial liabilities are classified as ‘at amortised cost’. Recognition and de-recognition of financial assets and liabilities ‘The Bank and Company recognise loans and advances to customers and banks and other financial assets on drawdown. Deposits by banks, customer accounts, debt securities in issue, other borrowed funds and other financial liabilities are recognised upon origination, “The Bank and Company derecognises a financial asset when the contractual rights to the cash flows from the ‘asset expite or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially al the risks and rewards of ownership of the financial asset are transferred. ‘Any interest in the transferred financial asset that is created or retained by the Bank and Company is recognised as a separate asset. The Bank and Company derecognises a financial liability when its contractual obligations are discharged or cancelled or expired.Bank of Scotland (Ireland) Limited Accounting policies Revenue recognition Interest income and expense are recognised in the income statement for all interest-bearing financial instruments, except for those classified at fair value through profit or loss, using the effective interest method. ‘The effective interest method is a method of calculating the amortised cost of a financial asset or Tiability and of allocating the interest income or interest expense over the estimated life of the financial instrument. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate, a shorter period, to the net ‘carrying amount of the financial asset or financial liability, ‘The effective interest rate is calculated on initial recognition of the financial asset or liability, estimating the fature cash flows after considering all the contractual terms of the instrument but not future credit losses. ‘The calculation includes all amounts expected to be paid or received by the Bank including expected early redemption fees and related penalties and premiums and discounts that are an integral part of the overall return, Direct incremental transaction costs related to the acquisition of a financial instrument are also taken {nto account in the calculation, Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to ‘discount the future cash flows for the purpose of measuring the impairment loss. Fees and commissions, which are not an integral part of the effective interest rate, are generally recognised ‘when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan once drawn. Where it is unlikely that loan commitments will be drawn, loan commitment fees are recognised over the life of the facility. Loan syndication fees are recognised as revenue when the Syndication has been completed and the Bank retains no part ofthe loan package for itself or retains a part at the same effective interest rate for all interest-bearing financial instruments, including loans and advances, as for the other participants. Dividend income is recognised when the right to receive payment is established. Cash and cash equivalents Cash and cash equivalents are held for the purpose of meeting short-term cash commitments rather than investing or other purposes. Cash and cash equivalents consist of cash and balances at the Central Bank that are freely available and loans and advances to banks within an original maturity of three months or less. Loans and advances Loans and advances are initially recognised at the draw down date at fair value plus directly attributable incremental transaction costs, They are subsequently carried at amortised cost using the effective interest ‘method, less provision for impairment, The initial fair value of loans and advances to customers is measured at draw-down date and calculated by discounting anticipated cash flows, including interest, at a current market rate of interest. “The Bank assesses whether objective evidence of impairment exists individually for loans and advances that are individually significant and individually or collectively for loans that are not significant. Individual impairments identified at a counterparty specific level following objective evidence thatthe financial asset is impaired. The estimation involved in these impairment assessments is considered a critical accounting estimate, Objective evidence that a loan is impaired includes significant difficulty ofthe customer, breach of a banking ‘covenant or contract such as interest or principal payments being missed or the loan being in excess of facility limit for a sustained period. Objective evidence may also arise from wider economic and financial market indicators including factors that pertain to a particular industry sector or local economy. 20°Bank of Scotland (Ireland) Limited ‘Accounting policies Loans and advances (con ued) ‘The amount of any impairment is calculated by comparing the net present value of estimated future cash flows, discounted at the loan’s original effective interest rate with the carrying value of the loan. If impaired, the carrying value of the loan is adjusted on the Balance Sheet and impairment is charged to the Income ‘Statement. ‘The written down value of the impaired loan is compounded back to the net realisable balance ver time using the original effective interest rate. This is reported through interest income in the Income Statement and represents the unwinding of the discount. A write-off is made when it is not possible or ‘economically viable to collect all or part ofa claim. Write-offs are offset against the release of a previously established impairment provision or directly to the Income Statement. Loans with no identified evidence of individual impairment are subject to collective impairment assessment. This is to quantify impairment losses which exist at the balance sheet date, but which have not yet been individually identified. Collective assessment is carried out for groups of assets that share similar risk characteristics, Collective impairment is assessed using a methodology based on existing risk conditions or vents that have a strong correlation with a tendency to default and include the use of historical trends and ‘adjustment factors to reflect current economic and credit conditions, Loans and advances that are performing in accordance with the underlying contract are classified as neither past due nor impaired. Ifa customer fails 0 make a payment that is contractually due, or if the loan is in Excess of the facility limit, the loan is classified as past due. If subsequently all contractually due payments fre made or if the loan continues to operate within limit, the loan reverts to its neither past due nor impaired status. Loans and advances to customers include advances that are subject to non-returnable finance arrangements, following securitisation of portfolios of mortgages and other advances. ‘The principal benefits of these advances are acquired by special purpose securitisation entities that fund their purchase primarily through the issue of debt securities. Derivatives Derivatives are measured at fair value and initially recognised on the date the contract is entered into and are subsequently classified as financial assets or liabilities held for trading. Where the fair value of a derivative is positive, itis carried as a derivative asset and where negative, as a derivative liability. The gain or loss from changes in fair value is recorded in net trading income in the Income Statement, except for interest from derivatives used for economic hedging purposes that do not qualify for hedge accounting treatment which are recorded in net interest income. Hedge accounting allows a financial instrument, generally a derivative such as a swap, to be designated as a hedge of another non-derivative financial instrument such as a loan or deposit or a portfolio of the same. At inception of the hedging relationship, formal documentation is drawn up specifying the hedging strategy, the ‘component transactions and the methodology that will be used to measure effectiveness. “Monitoring of hedge effectiveness is undertaken on a monthly basis. A hedge is regarded as effective if the change in fair value of the hedge instrument and the hedged item are negatively correlated within a range of 80% to 125%, either for the period since effectiveness was last tested or cumulatively since inception, Fair value hedge accounting offsets in the Income Statement the change in the fair value of the hedging Jnstrument against the change in the fai value ofthe hedged item in respect of the risk being hedged. The hedged item is adjusted for the fair value of the risk being hedged irrespective of is financial instrument Classification, These changes in fair value are recognised in the Income Statement through net trading. ‘income. Interest from hedging derivatives is ecorded in net intrest income.Bank of Scotland (Ireland) Limited Accounting policies Derivatives (continued) ‘Adjustments made to the carrying amount of the hedged item for fair value hedges will be amortised on an effective interest rate basis over the remaining expected life in line with the presentation of the underlying hedged item. Ifthe hedge is highly effective the net impact on the Income Statement is minimised, If quoted or market values are not available then derivative fair values are determined by using a pricing model referencing appropriate yield curves, taking into account discounted cash flows, maturity dates and interest rates. These techniques include discounted cash flow analysis and other pricing models. ‘The fair values calculated from these models are regularly compared with prices obtained in actual market transactions to ensure reliability. Details of valuations and methodologies applied are detailed in notes 27, 28 and 29 to these accounts. Deposits by banks and customer accounts Customer accounts and deposits by banks are held at amortised cost using the effective interest method. The fair value of customer deposits with no stated maturity date is the amount repayable on demand. The ccatimated fair value of fixed interest bearing deposits and other borrowings with no quoted market price is calculated using rates for debts with similar maturity and credit rating. ance leases, operating leases and instalment credit ‘Assets leased to customers that transfer substantially all the risks and rewards incidental to ownership to the ‘customers are classified as finance leases, Together with hire purchase agreements, they are recorded at an famount equal to the net investment in the lease, less any provisions for impairment, within loans and advances to customers. ‘The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the pre-tax net investment ‘method, which reflects a constant periodic rate of return on the net investment, All other assets leased to customers that do not transfer substantially all the risks and rewards of ownership are classified as operating leases. These assets, less any provision for impairment, are separately disclosed in the notes to the Balance Sheet and are recorded at cost less aggregate depreciation, which is calculated on a straight-line basis over their estimated lives. Operating lease rentals are recognised in operating income on a Straightline basis over the lease term, Finance and operating lease assets are regularly reviewed for impairment, Leases entered into by the Bank as lessee are primarily operating leases. Operating lease rentals payable are recognised as an expense in the Income Statement on a straight-line basis over the term of the lease unless a ‘more systematic basis is more appropriate. Sale and repurchase agreements Debt securities sold subject to repurchase agreements are retained within the Balance Sheet where the Bank retains substantially ll of the risks and rewards of ownership. Funds received under these arrangements are included within deposits by banks or customer accounts. Conversely, debt securities acquired under commitments to resell are not recognised in the Balance Sheet as debt securities where substantially all the risks and rewards do not pass to the Bank. In this case, the purchase price is included within loans and ‘advances to customers or loan and advances to banks. The difference between the sale and repurchase prices for such transactions is reflected in the Income Statement over the lives of the transactions, within interest expense or interest income as appropriate.Bank of Scotland (Ireland) Limited Accounting policies Investment securities Investment securities held for trading are carried at fair value. Gains, losses and related income are recorded in net trading income as they arise, Investment securities designated at fair value through the Income Statement are also carried at fair value. Gains, losses and related income are recorded in other operating Debt securities other than those held for trading or designated at fair value and for which there is no active market at inception are classified as loans and receivables. ‘They are initially recognised at fair value plus directly related incremental transaction costs and are subsequently carried on the Balance Sheet at amortised ‘cost using the effective interest method less provision for impairment. ‘Allother investment securities are classified as available for sale. They are initially recognised at fair value plus directly related incremental transaction costs and are subsequently carried on the Balance Sheet at fair Value. Unrealised gains or losses arising from changes in fair value are recognised directly in equity, in the fvailable for sale reserve in other reserves, except for impairment losses or foreign exchange gains or losses related to debt securities, which are recognised immediately in the Income Statement in impairment losses on investment securities or other operating income respectively. Income on debt securities is recognised on an effective interest rate basis and taken to interest income through the Income Statement. Income from equity shares is credited to other operating income, with income on listed equity shares being credited on the ex-dividend date and income on unlisted equity shares being credited on an equivalent basis. On sale or maturity, unrealised gains and losses are recognised in other operating income. Investment securities classified as available for sale are continually reviewed at the specific investment level for impairment. Impairment is recognised when there is objective evidence that a specific financial asset is impaired. Objective evidence of impairment might include a significant or prolonged decline in market ‘Value below the original cost of a financial asset and, in the case of debt securities, non-receipt of interest due fr principal repayment, a breach of covenant within a security's terms and conditions or a measurable dlecrease in the estimated future cash flows since their initial recognition. Impairment losses on available for sale equity instruments are not reversed through the Income Statement. ‘Any increase in the fair value of an available for sale equity instrument after an impairment loss has been recognised is treated as a revaluation and recognised directly in equity. An impairment loss on an available for sale debt instrument is reversed through the Income Statement, if there is evidence that the increase in fair value is due to an event that occurred after the impairment loss was recognised, Objective evidence of impairment results in the carrying value of assets being written down with the charge recognised in the Income Statement. ‘The fair values of investment securities trading in active markets are based on market prices or broker/dealer valuations, Where quoted prices on instruments are not readily and regularly available from a recognised broker, dealer or pricing service, or available prices do not represent regular transactions in the market, the fair values are estimated, using quoted market prices for securities with similar credit, maturity and yield characteristics or similar valuation models. ‘The Bank uses trade date accounting when recording the purchase and sale of investment securities.Bank of Scotland (Iréland) Limited ‘Accounting policies Intangible assets - Goodwill “The excess of the cost of a business combination over the interest in net fair value of the identifiable assets, fiabilities and contingent liabilities at the date of acquisition, of subsidiary undertakings, jointly controlled entities and other businesses, is capitalised as goodwill. The goodwill is allocated to the cash-generating unit ‘or group of units that are expected to benefit from the acquisition concemed. In all cases, the cash generating ‘units represent the business acquired, ‘After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Cash generating units to which goodwill is allocated are subject to a bi-annual impairment review, by comparing the value in use with the carrying value. When this indicates that the carrying value is not recoverable, goodwill is written down through the Income Statement by the amount of any impairment loss identified. Other intangibles assets - Software Costs associated with the development of software for intemal use, subject to de-minimis limits, are Copitalised only if the software is technically feasible and the Bank has both the intent and sufficient resources to complete the development. Costs are only capitalised ifthe asset ean be reliably measured and ifthe asset will generate future economic benefits to the Bank either through use or sa. Only costs that are directly attributable to bringing the asset into working condition for its intended use are capitalised. These costs include all directly attributable costs necessary to create, produce and prepare the ecet to be capable of operating in a manner intended by management. Other development expenditure, including software research development costs, is recognised in the Income Statement as an expense when incurred. Capital development expenditure and purchased software is stated at cost less accumulated amortisation and impairment losses. Once software is ready for use, the capitalised costs are amortised over their expected lives, of between four and seven years. Capitalised software is assessed for impairment where there is an indication of impairment, Where impairment exists, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss recognised in the Income Statement. The amortisation charge for the asset is then adjusted to reflect the asset's revised carrying amount. Subsequent expenditure is only capitalised when it increases the future economic benefits embodied in the specific asset to which it relates. Property and equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Frechold land is not depreciated. Frechold and leasehold property, other than freehold investment properties, is stated at cost and depreciated over 50 years or the length of the lease term, if shorter. Improvements to easchold properties with unexpired lease terms of 50 years or less are stated at cost and depreciated in equal instalments over the lesser of the remaining life of the lease or eight years. Premiums are amortised over the period of the lease. Depreciation on the components of equipment is calculated using the straight-line method to allocate their cost to their estimated residual values over their expected useful lives as follows: Fixtures and fittings ~ 10 years Motor vehicles 4 years ‘Computer hardware Telephony — 8 years =Non-telephony 6 years Software — 5 yearsBank of Scotland (Ireland) Limited Accounting policies Property and equipment (continued) Subsequent costs are included in the asset’s carrying amount, only when it is probable that furure economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. Property and equipment is assessed for impairment where there is an indication of impairment. Where impairment exists, the carrying amount of the asset is reduced to its recoverable amount and the impairment joss recognised in the Income Statement. The depreciation charge for the asset is then adjusted to reflect the asset's revised carrying amount. Investment properties Investment properties comprise freehold and leasehold property that are held for capital appreciation. They are initially recognised at cost and are fair valued annually. Properties acquired with a view to subsequent disposal within three years, are categorised as property and equipment. Taxation Income tax included in the Income Statement for the year comprises current and deferred taxation. Income tax is recognised in the Income Statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised directly in equity. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements, However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction ther than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date which are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled Deferred tax assets are recognised where it is probable that future taxable profit will be available, against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Bank and it is probable that the difference will not reverse in the foreseeable future. Income tax payable on profits is recognised as an expense in the period in which those profits arise. ‘The tax effects of losses available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised. Deferred tax related to fair value Temeasurement of available-for-sale investments and cash flow hedges, which are charged or credited directly to equity, is also credited or charged directly to equity and is subsequently recognised in the income statement together with the deferred gain or loss. Deferred and current tax assets and liabilities are offset when they arise in the same tax reporting group and where there is both a legal right of offset and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously. Other provisions “The Bank recognises a provision if there is a present obligation as a consequence of either a legal or constructive obligation resulting from a past event. To recognise this it should be probable that an outflow of feonomie resources that can be reliably measured will be required to settle the obligation. Provisions are measured as the discounted expected future cash flows taking account of the risks and uncertainties associated with the specific liability where appropriate. A constructive obligation is only deemed to exist in respect of restructuring provisions once a detailed restructuring plan has been formally approved and the plan has been announced publicly 25;Bank of Scotland (Ireland) Limited Accounting policies Debt securities in issue |All debt securities in issue are held at amortised cost. They are intially recognised at fair value plus directly related incremental transaction costs and are subsequently carried on the Balance Sheet at amortised cost Using the effective interest method. Interest payable is recognised in the Income Statement through interest expense, Other borrowed funds Other borrowed funds comprise subordinated liabilities held at amortised cost using the effective interest method. ‘Subordinated liabilities consist of dated-and undated loan capital. The interest payable is recognised in the Income Statement through interest expense. Netting Financial assets and liabilities are offset and the net amount reported in the Balance Sheet when there is a legally enforceable right of offset and there isan intention and ability to settle on a net or simultaneous basis. ‘Where master netting agreements allow for offset only on default by one of the partes, the Bank presents the disclosures on a gross basis. Share capital Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds. Share based payments ‘The Bank’s parent, LBG, operates various equity-settled share-based compensation schemes in exchange for employee services received, in which the employees of the Group are entitled to participate. The fair value of options or shares granted are determined at the date of grant and expensed over the vesting period. The fair value of the options or shares granted is measured using the binomial lattice model, taking account of the terms and conditions upon which the options and shares were granted. Market conditions are taken into ‘account to set the fair value at grant and are not updated. Non-market vesting conditions, including non- market performance conditions, are not reflected in the grant date fair value but are reflected within estimates, (of the number of options or shares expected to vest. ‘Any adjustments required as a result of updating these estimates are taken to the Income Statement over the remaining vesting period. Modifications are assessed at the date of modification and any incremental charges required are charged to the Income Statement over any remaining vesting period. For share based ‘compensation schemes settled by LBG a recharge equal tothe cost during the period is made to the Bank Guarantees Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder fora loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantees are initially recognised at fair value, ‘They are subsequently measured at the higher of the amount determined under the Bank’s accounting policy on provisions and the amount initially recognised less cumulative amortisation recognised to record any fee income earned in the period.Bank of Scotland (Ireland) Limited ‘Accounting policies Post Reti sment Schemes Defined contribution scheme Obligations for contributions to defined contribution pension schemes are recognised as an expense in the income statement as incurred Defined benefit schemes ‘The net obligation represents the present value of the future benefits owed to employees in return for their service in the current and prior periods, after the deduction of the fair value of any plan assets. The discount Tate used is the market yield on high quality corporate bonds at the balance sheet date that have maturity dates approximating to the terms of the Bank's obligation. The calculation is performed by a qualified actuary using the projected unit credit method. Actuarial gains and losses arising are taken directly to reserves in the period in which they are incurred. The charge to the income statement includes current Service cost, past service cost, the interest cost of the scheme liabilities and the expected return on scheme assets. Foreign currencies ‘The Bank’s financial statements are presented in Euro which is the functional currency of the parent company and all of its subsidiaries except BOS (Ireland) Intemational Finance Limited whose functional ‘currency is US Dollar. Foreign currency transactions are translated into Euro at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities dominated in foreign currencies are translated at balance sheet date exchange rates, Exchange differences arising are recognised in other operating income in the Income Statement. ‘Non-monetary assets and liabilities carried at historical cost are translated using the historical exchange rate Non-monetary assets and liabilities carried at fair value are translated at exchange rates on the date the fair value is determined. Exchange differences arising are recognised in the Income Statement. ‘The results and financial position of all Bank entities that have a functional currency different from translated into Euro as follows: + assets and liabilities for each Balance Sheet presented are translated at the closing rate at the date of the Balance Sheet; and 1+ income and expenses are translated at the average exchange rates for the period (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in ‘which case income and expenses are translated at the dates of the transactions). Critical accounting est ates and judgements ‘The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amount of assets, liabilities, income and expense. Due to the inherent ‘uncertainty in making estimates, actual resulls reported in future periods may be based on amounts which iffer from those estimates. Judgements, estimates and assumptions 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. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected,Bank of Scotland (Ireland) Limited Accounting policies Critical accounting estimates and judgements (continued) “The principal critical accounting estimates made by the Bank that have @ material financial impact on the financial statements are as follows ‘+ Impairment losses on loans and advances “The Bank regularly reviews its loan portfolios to assess for impairment. Impairment allowances are established to recognise incurred impairment losses in its loan portfolios carried at amontised cost. In determining whether an impairment has occurred atthe balance sheet date the Bank considers whether there is any observable data indicating that there has been a measurable decrease in the estimated future cash flows or ther timings; such observable data includes information as to whether there has been an fsdverse change in the payment status of borrowers or changes in economic conditions that correlate with defaults on loan repayment obligations. Where this is the case, the impairment loss is the difference between the carrying value of the loan and the present value of the estimated future cash flows discounted at the loan's original effective intrest rate. ‘At 31 December 2009 gross loans and advances to customers totalled €32,7bn (2008: €32.6bn) against ‘which impairment allowances of €4.0bn (2008: €0.7bn) had been made, ‘There are two components of the Bank's loan impairment allowances: individual and collective. All impaired loans which exceed a certain threshold, principally within the Bank’s corporate and commercial banking business, are individually assessed for impairment having regard to expected future cash flows including those that could arise from the realisation of security. The determination of these allowances often equires the exercise of considerable judgement by management involving matters such as the; * local economic conditions, + trading performance of the customer value of the security held including an estimation as to expected return of liquidity to property ‘markets and the ‘peak to trough” decline in property values. ‘The actual amount of the future cash flows and their timing may differ significantly from the assumptions made for the purposes of determining the impairment allowances and consequently these allowances can be subject to variation as time progresses and the circumstances of the customer become clearer, Impairment allowances for portfolios of smaller balance homogenous loans, such as residential ‘morigages, personal loans and credit card balances that are below the individual assessment thresholds, and for loan losses that have been incurred but not separately identified at the balance sheet date, are determined on a collective basis. Collective impairment allowances are calculated on a portfolio basis, using formulae which take into account factors such as the length of time that the customer's account has been out of order, historical loss rates, the credit quality of the portfolios and the value of any security held, which is estimated, where appropriate, using indices such as house price indices. The variables used in the formulae are kept under regular review to ensure that as far as possible they reflect current economic circumstances; however changes in interest rates, unemployment levels and bankruptcy trends could result in actual losses differing from reported impairment allowances. © Deferred taxation In accordance with accounting policies the Bank has not recognised any deferred tax on its Balance Sheet due to uncertainty as to the availability of adequate taxable profits in the foreseeable future, except to the extent that the deferred taxation asset relates to the fair value measurement of available-for-sale investments or pension liabilities recorded directly in equity. Further details on deferred taxation are set ‘out in note 24.Bank of Scotland (Ireland) Limited Accounting policies Critical accounting estimates and judgements (continued) + Defined benefit pension schemes The estimation of the expected cash flows used in the calculation of the defined benefit pension schemes liabilities includes a number of assumptions around mortality, inflation rates applicable to defined benefits and the average expected service lives of the employees. “The selection of these assumptions requires the application of significant judgement by the Bank, which has a material impact on the estimation of the pension liabilities. The discount rate used by the Bank to calculate the defined benefit scheme liabilities is based on the market yield at the balance sheet date of hhigh quality bonds with a similar duration to that of the schemes” liabilities. The sensitivity of the scheme liabilities to changes in the principal assumptions used are set out in note 7. New accounting standards ‘The following IFRS pronouncement has been adopted in these consolidated financial statements and it has had a material impact on the presentation of these financial statements: IAS 1 (revised), ‘Presentation of financial statements’: The revised standard prohibits the presentation of items of income and expense (that is ‘non-owner changes in equity’) in the Statement of Changes in Equity, requiring ‘non-owner changes in equity” to be presented separately from owner changes in equity. All non- ‘owner changes in equity are required to be shown in a performance statement. Entities can choose whether to present one performance statement (the Statement of Comprehensive Income) or two statements (the Income Statement and Statement of Comprehensive Income). The Bank has elected to present two statements: an Income Statement and a Statement of Comprehensive Income. The financial statements have been prepared under the revised disclosure requirements; the application of this revised standard, which affects presentation only, has not had any impact for amounts recognised in these financial statements, “The application of the following IFRS pronouncements, which all became effective in 2009, has had no ‘material impact on these financial statements: IFRS 2 (Amendment), Share Based Payments TERS 7 (Amendment), Financial Instruments: Disclosures ~ Improving Disclosures about Financial Instruments ‘© TERS 8, Operating Segments IFRIC 9 (Amendment), Reassessment of Embedded Derivatives and IAS 39 (Amendment) Financial Instruments: Recognition and Measurement IFRIC 13, Customer Loyalty Programme TERIC 16, Hedges ofa Net Investment in a Foreign Operation IAS 23, Borrowing Cost IAS 32 (Amendment), Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements Puttable Financial Instruments and Obligations Arising on Liquidation. Improvements to IFRSs (issued May 2008) IAS 27 (Amendment), Consolidated and Separate Financial StatementsBank of Scotland (Ireland) Limited Accounting policies New accounting standards (continued) “The following pronouncements will be relevant to the Bank but were not effective at 31 December 2009 and have not been applied in preparing these financial statements’ + IFRS 9, Financial instruments + TFRS3 (Revised), Business combinations + IAS 24 (Amendment), Related Party Disclosures © TERIC 17, Distributions of Non-cash Assets to Owners © IFRIC 18, Transfers of Assets from Customers, + IFRIC 14 (Amendment), Prepayments of a Minimum Funding Requirement © IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments ‘The Bank is currently assessing the impact that these accounting changes will have on the 2010 financial statements. 30Bank of Scotland (Ireland) Limited Consolidated Income Statement For year ended 31 December 2009 Notes 2009 2008 m én Interest income 1,240 2,363, Ierest expense (680) 797) Net interest income 1 60 56 Fees and commission income 24 29 Fees and commission expense : _ ‘Net trading expense (6) 2) Other operating income 6 § Non interest income 2 24 34 Operating expenses 3 __@1 e17 Operating profit before impairments 370 383 Impairments oans and advances to customers 1 @286) (552) investment securities B (3) 69) = goodwill 7 ea Z Share of losses of jointly controled entities 4 2) 4) Loss before taxation 2.965) 12) Taxation ee 28. Loss for the year 2.971 184 Consolidated Statement of Comprehensive Income 2009 2008 Notes ém ém Loss for the year @sny (say Other comprehensive income Ofovemens in available fr sale financial assets (net of tax) n ay ~ Net actuarial gain/(losses) from defined benefit plans (net of ax) 7 7 oa ‘Total comprehensive income for the year a {attributable to equity holders) 2893) __ ss). ‘The accounting policies on pages 18 to 30 and the notes on pages 36 to 74 form part of statements “Approved by the Board on 26 February 2010 and signed on its behalf by: aS. these financial M. Py M, Quinn Highs L. Finn DiredYor Director Director Sey taryBank of Scotland (Ireland) Limited Balance Sheet As at 31 December 2009 Bank Company Notes 2009 2008 2009 2008 €m €m €m €m Assets Cash and balances at Central Bank 785, on 6B Derivative assets a 30 29 29 Loans and advances to banks 9 593 3,455 3,453 Loans and advances to customers 10 28,665 31,907 31,916 Investment securities B 1,547 11876 6.186 Interests in jointly controlled entities, 14 9 3 : Interests in subsidiary undertakings 15 2 : 179 Investment properties 16 1 Goodwill and other intangible assets "7 a Property and equipment 18 40. Current taxation 27 Deferred taxation 24 40 Other assets, u Prepayments and accrued income a Total assets BAC Liabilities Deposits by banks 19 24814 28,364 24,814 28,364 Deposits by customers 20 3,988 6,610 12,624 11,196 Derivative liabilities 2 154 143 154 127 Retirement benefit liabilities 7 36 44 36 44 Other liabilities 41 31 2 32 Accruals and deferred income 30 2 29 21 Debt securities in issue 21 8 37 : - Other borrowed funds 2 om. 691 ‘Total liabilities 25,748 35,962 Shareholders’ equity Issued share capital 26 453, 218 453 218 Share premium 3,666 1,201 3,666 1,201 Other reserves as) (90) 16 7) Retained earnings 2,050) 914 (2,188) 789 Shareholders’ equity 2,050 22 1947 2,151, ‘Total liabilities and shareholders’ equity 31,798 38,205 40323 42,626 “The accounting policies on pages 18 to 30 and the notes on pages 36 to 74 form part of these financial statements, Approved by the Board on 26 February 2010 and signed on its behalf by M. Prat M. Quinn Fifi Direct Director Director crtaryBank of Scotland (Ireland) Limited Statement of Changes in Equity Bank Balance at 31 December 2007 Loss for the period Movements in available for sale financial assets (net of tax) ‘Net actuarial loss from defined benefit plans Total comprehensive income Issue of shares Balance at 31 December 2008 Loss for the period Movements in available for sale financial assets (net of tax) ‘Net actuarial gain from defined benefit plans ‘Total comprehensive income Issue of shares Balance at 31 December 2009 Company Balance at 31 December 2007 Loss for the period ‘Movements in available for sale financial assets (net of tax) [Net actuarial loss from defined benefit plans ‘Total comprehensive income Issue of shares Balance at 31 December 2008 Loss forthe period Movements in available for sale financial assets (net of tax) ‘Net actuarial gain from defined benefit plans ‘Total comprehensive income Issue of shares Balance at 31 December 2009 Other Retained reserves profits Total em €m €m 669 (20) 1,132 1,781 : . (asa) (asa) : (70) . (70) oe . Go G18) (88) 750 e 750 : 1419 90), oie 2243 - eg) . 1 ee SEs = 883) __2,700 2,050. Share capital & Other Retained premium reserves, profits ‘Total én én €m ém 669 6 992 1,667 : : (169) (169) : (6) - (63) — G4) __G4)_ : (203) (266) 750 739 2181 . (2,984) (2,984) : : B ae G57) @:908) 49 dG (2,188) 1,947,Bank of Scotland (Ireland) Limited Cash Flow Statements For year ended 31 December 2009 Bank Company CASH FLOW FROM OPERATING ACTIVITIES Nets 200920082009 2008 €m €m €m €m Loss before taxation (2,965) (212)_——(2,980)—(196) Adjustments for Share of losses of jointly controled entities M4 2 3 : : Movement in prepayments and accrued income 9 2 15 6) Movement in accruals and deferred income 8 © 3 8) Impairment losses on loans and advances 1 3,286 552 3,280 351 Impairment of goodwill "7 24 : - : Depreciation and amortisation 24 18 “4 2 Movement in derivatives 10 BI 26 ns Interest on other borrowed funds 19 40 19 40 Profit on sale of investment securities : ® - @) Impairment losses on investment securities 13 B 39 23 39 Impairment losses on interests in subsidiary undertakings 15 : : ct : Changes in fair value investment property 16 2 f - : Pension charge for defined benefit schemes 7 8 3 8 4 Cash contribution to defined benefit schemes 1 8) © o 6 Foreign exchange differences a) 15 6) 20 Other non-cash items a a 195) 7 [Net cash flows from trading act 440 373 240 36 ‘Net changes in operating assets and liabilities: ‘Net (increase)/decrease in cash and balances a2 461 (112) 461 Net decrease/(increase) in loans & advances to banks and customers 839 (3,040) Tal 6,280) Net (increase)/decrease in other assets ” 4 6) a) ‘Net increasel(decrease) in other liabilities 192010 (16) 10 (as) [Net decrease in deposits by banks and customers 21 6172) (4491) 122)— (1,407) Net decrease in debt issued 9) (160) : i Net cash flows from operating activities before Boy “Best “sy Gee taxation Income taxes refunded/(paid) 2 «2 2 io Cosh ows rom operating a! Ciay Gay To Cash flows from investing activities (a) 384 206 (3,415) 203 Cash flows from financing activities (b) 2,66 702 _ 2,666 702 Net decrease in cash and cash equivalents 979) ~@Imy “0.979 TR) Opening cash and cash equivalents 2515 $287 _2,515 ‘Closing cash and cash equivalents Be 21s Be 2s CASH AND CASH EQUIVALENTS 2009 2008 ~==«-2009-SS«(2008 ém €m €m €m ‘Loans and advances to banks = repayable less than three months 536 _ 2,515 536 Closing cash and cash equivalents 336 «2515 «S36 d | 1Bank of Scotland (Ireland) Limited Cash Flow Statements For year ended 31 December 2009 Bank Company NOTES TO THE CASH FLOW STATEMENT Notes 2009 -2008-===(2009-= 2008 €m €m €m m (a) Investing activities ' Sale and maturity of investment securities 407 29 402 29 Purchase of investment securities aa) (6,808) a) Purchase of other intangible assets vy 0 o ©) Sale of property and equipment 8 1 6 - w Purchase of property and equipment 8G) 16 ye (12) Cash flows from investing activities 384 206 Gals) 203 (b) Financing activities Issue of shares 26 2,700 750 2,700 750 Repayment of other borrowed funds 2 (4) ® a4) 6) Interest on subordinated liabilities and other borrowed funds relating to servicing of finance 20) 020 (40) Cash flows from financing activities 2,666, “2.666 702 ‘The accounting policies on pages 18 to 30 and the notes on pages 36 to 74 form part of these financial statementsBank of Scotland (Ireland) Limited Notes to the financial statements 1. Net interest income Interest income: ‘Loans and advances to customers. Loans and advances to banks Lease and hire purchase income Interest income on loans and advances ‘Available for sale financial assets. ‘Total interest income Interest expense: Deposits from banks Customer accounts Debt securities in issue Other borrowed funds ‘Total interest expense Net interest income Included within interest income on loans and advances to customers is income in respect of impaired financial assets Non interest income Fees and commission income Fees and commission expense ‘Net trading expense ~ net Losses from hedging instruments ~ net gains from hedged items ‘The Bank does not take any proprietary trading positions; net trading expense results from hedge ineffectiveness. Other operating income = Realised gains less losses on sale of financial instruments designated as available for sale = Wealth management, foreign exchange and fiduciary income Non interest income 2009 €m 1,133 37 18 1,208 491 169 19 680. 560 8 2009 €m 24 (128) 8 © 2008 €m 1,976 261 24 2.261 102 2,363,Bank of Scotland (Ireland) Limited Notes to the financial statements 3. Operating expenses 2009 €m Staff costs (note 4) 1S Depreciation of propesty and equipment (note 18) 8 “Amortisation of intangible assets (note 17) 16 ‘Accommodation, repairs and maintenance 2 Technology 10 ‘Marketing and communication 4 Other administrative expenses 30 Total 214 4. Staff costs ‘The aggregate remuneration payable included within staff costs to those employees comprises: 2009 €m Wages and salaries * Social security costs 9 Post-retirement benefits (note 7) rf Expenses arising from share based payments (note 6) 1 Total 37 2009 “The average number of personnel employed by the Bank during the year was: Fulltime 1,879 Parttime fit 1,694 Auditor’s remuneration 2008 €m us 10 19 B 33 217 2008 €m 95 n iis 2008 1,653 104 1757 ‘The aggregate remuneration for the Bank’s auditor, PwC (2008: KPMG), for audit and other services (gross of VAT) included within operating expenses is analysed below. PwC 2009 e000 Audit services Statutory audit 532 Audit-related reporting, 5 ‘Total audit services comes Tax services Soa ‘Advisory services : ‘Total tax services —_—~ Other services 4 Total non-audit services a Total 336 KPMG 2008 €000 450 134 384 40 40 66 06 690Bank of Scotland (Ireland) Limited Notes to the financial statements 6. Share based payments The profit of the Bank and Company is stated after deducting an amount of €0.7m (2008: €1.0m) in respect of services received by the Company, which have been settled by way of share-based payment arrangements. {All staff providing services to the Bank are entitled to participate in share plans of the Bank's parent, LBG, in ‘whose shares settlement is made. Details of the share-based payment schemes of LBG are disclosed on an aggregated basis in the LBG consolidated financial statements. Payments under the long-term incentive scheme are dependent upon the operating performance of the Bank 2009 2008 €000 €000 ‘Total share based payments: Expense arising from share based payment transactions 80 368 Expense arising from share and share-option plans 62 600 Long term incentive plan aa ” Expense charged to Income Statement (note 4) 7497 ae 7. Post retirement benefits ‘The Bank has three principal pension schemes as outlined below: Name Type Status “The Bank of Scotland (Ireland) Pension pian Defined Benefit Closed to new entrants The Ba ‘of Scotland (Ireland) Defined Contribution pension ,.t:seq Contribution Commenced in 2003 ‘The Bank of Scotland (Ireland) Hybrid Pension plan Hybrid ‘Commenced in 2009 “Assets of all schemes are held separately from those of the Bank in separate trustee administered funds. Defined contribution post employment benefit plans ‘The expense recognised for defined contribution plans for the year ended 31 December 2009 is €3.4m (2008: €3.8m), All payments were made by 31 December 2009 with no accruals. Defined benefit post employment benefit plans In determining the level of contributions required to be made to the defined benefit schemes and the relevant charges to the Bank’s Income Statement, the Bank has been advised by independent actuaries. The most recent published formal valuations were carried out as at 31 December 2009. The financial assumptions are derived From the economic conditions prevailing at the date of valuation. ‘The amount included in the Balance Sheet arising from the Bank and Company's obligations in respect of its defined benefit plans is as follows: 2009 (20087) Defined Defined Benefit Hybrid Total ~—_—Benefit €m €m ém €m Defined benefit obligation at 31 December asn @) (60) (aa) Fair value of plan assets at 31 December 120 4 124 103 Net post retirement benefit ( gain Sa = recognised at 31 December 67) 1 _ 66 (44)Bank of Scotland (Ireland) Limited Notes to the financial statements Post retirement benefits (continued) 2009 2008, €m ‘én Movements in the defined benefit obligation were as follows: Defined benefit obligation at 1 January 147 144 Current service cost 6 4 Benefits paid @ @) Employee contributions 2 1 Interest cost 8 8 ‘Actuarial gain/(loss) on plan liabilities 1 6) Defined benefit obligation at 31 December 07 147 Movements in the fair value of plan assets were as follows: Fair value of plan assets at 1 January 103 136 Expected return on plan assets 6 3 ‘Actuarial gain/(loss) on plan assets 9 (4s) Employer contributions 8 6 Benefits paid a @ Employee contributions 2 1 Fair value of plan assets at 31 December Te ies ‘Analysis of the fair value of plan assets and the expected rate of retum at 31 December 2009 and 2008 was as follows: Expected return Allocation of assets 2009 2008 2009 2008 Equities 8.0% 78% 59.8% 53.3% Fixed Interest Gilts 45% 3.1% 22.3% 21.4% Index Linked Gits 45% 3.7% 19% 9.4% Property 1.0% 6.8% 41% 6.8% Money Market Instruments and Cash 15% 2.0% 5.9% 3.2% ‘Total fair value of plan assets G Ye 00% —T00% ‘The overall expected rate of return is determined as the weighted average rate of return on the portfolio of assets held, ‘The five year history of experience adjustments is as follows: As at31 December 2009 2008 2007 2006 2005 €m €m €m €m €m Defined benefit obligation (160) aan (aay (146) (128) Fair value of plan assets 124 103 136 127 109 Net liabilities G6) 4) @ 19) 19) Experience adjustments on plan liabilities Amounts (Em) 6 6) Percentage of plan lial 3.8% 49% Experience adjustments on plan assets ‘Amounts (Em) 9 (as an 1 2 Percentage of plan assets (%) 73% _ (3.9%) ~ @1%) _ 58% __~113%Bank of Scotland (Ireland) Limited Notes to the financial statements 7. Post retirement benefits (continued) ‘The actuarial losses recognised in the statement of comprehensive income and expense for the year ending 31 December comprises: 2009 2008 €ém €m Experience gain/(loss) on plan assets 9 (a3) Experience gain/(loss) on plan liabilities é @ (Loss)/gain from change in assumptions os Actuarial gain/(loss) ae ay Deferred tax i Z ‘Actuarial gains/(losses) net of tax 7 aay Expected return on plan assets and interest costs has been recorded in net interest income with current service cost recorded within other operating expenses. The total expense recognised in the Income Statement for the ‘years ending 31 December is as follows: 2009 2008 m én Current service cost © @ Interest cost ® ® Expected return on plan assets 3 Total pension expense | “The expected and actual return on plan assets for the Bank is as follows: 2009 2008 én €m Expected return on plan assets 6 > ‘Actuarial gain/(loss) on plan assets 9 45) ‘Actual return on plan assets is Sar ‘The Bank's policy for recognising actuarial gains and losses is to recognise them directly in equity in the period in which they are incurred. In the year ended 31 December 2009 €7.3m was recognised in the statement of comprehensive income and expense (2008: €34 4m). Cumulative actuarial gains and losses recognised in the statement of comprehensive ngome and expense at 31 December 2009 is €60.3m (2008: €67.6m) net of a deferred tax asset of €8.8m (2008: €9.7m). ‘The Bank expects to continue to pay contributions to the Scheme during 2010, in line with the recommendation of the actuary. ‘Sensitivity analysis for each of the principal assumptions used to measure the scheme liabilities, showing the increase in defined benefit obligations at 31 December 2009, is as follows: Factor Change in Increase in 2009 Increase in 2008 assumption ém €m Discount rate Decrease by 0.1% 3 a Rate of inflation Increase by 0.1% 2 1 Rate of salary growth Increase by 0.1% 1 1 Life expectancy at age 60 Increase by 1 year 5 5 “40——:Bank of Scotland (Ireland) Limited Notes to the financial statements 7. Post retirement benefits (continued) Summary of assumptions ‘The disclosures above are based on the assumptions below, using the projected unit method of valuation, A. Actuarial assumptions 2009 2008 Discount rate 5.1% 5.7% Expected rate of retum on plan assets 6.5% 6.0% Salary increases ' 3.5% 3.5% Social security increases 3.5% 3.5% Pension increases * 2.0% 20% Life expectancy at age 60 (years) Retired members Males 25.8 25.0 Females 276 219 Non ~ retired members Males 28.6 2719 Females 30.1 294 Notes: 1. In addition to the general assumed rate of salary increase, there is a separate assumed salary scale of inerease due to promotions and increasing seniority. 2. Anallowance for a fixed 3% per annum pension increase has been made for the Bank of Scotland Plan at 31 December 2009 (3% at 31 December 2008) in line with the rules of that Plan. Former members of ICC Bank Ple Staff Benefits Scheme, who now are members of the Bank of Scotland (Ireland) Pension Plan, receive a pension increase in line with inflation of 2% (2008: 2%). ‘Summary of membership data Defined Defined Benefit Contribution Hybrid ‘Scheme Scheme Scheme 2009-2008 2009 2008 2009 B, Active members Number 320 327 475 1,132 678 Covered annual payroll (€m) 26 27 20 8 30 ‘Average age 45 44 32 32 34 ‘Average length of service 4 3 3 3 3 C. Deferred members Number 34s 340 245230 7 Average age 46 45 34 37 35 D, Retired members (including dependants” pensions in payment) Number 89 88 ; . Total annual pensions (Em) 3 3 : : : Average age 66 6 : .Bank of Scotland (Ireland) Limited Notes to the financial statements 8. Taxation 2009 2008 €m €m Current tax Corporation tax credit for the year at a rate of 12.5% (2008: 12.5%) : 1) Corporation tax credit in respect of prior years : a) 1 o Deferred tax (note 24) Deferred tax charge/(credit) for the year ata rate of 12.5% (2008: 12.5%) 1 9) ‘Total taxation 6 23) Effective tax rate 13.2% Reconciliation of effective tax rate ‘The effective tax rate for the year is (lower)/higher than the standard rate of corporation tax in the Republic of Ireland of 12.5%. The differences are explained below: 2009 2008 €m €m Loss before taxation ___ 296 12 Loss multiplied by the standard rate of corporation tax inthe Republic of Inland om 26) Effects of: Transfer pricing tax credits (29) O) “Tax losses for which no deferred tax credit has been recognised 380 Other : a 2 “Total taxation 6 28) Deferred tax recognised directly in equity Relating to available for sale investment securities (10) Relating to actuarial (gain)/loss on defined benefit pension schemes 1) Total a) : “Tax effects relating to each component of comprehensive income are as follows: 2009 Beforetax Taxexpense After tax &n ém €n Movements in availabe forsale financial assets 81 (20) n ‘Actuarial gain from defined benefit plans 8 _@) 1 Other comprehensive income for the year 3 ny) 78 2008 Beforetx Taxbenefit, After tax em €m én Movements in available forsale financial assets (80) 10 (70) ‘Actuarial loss from defined benefit plans 69) af Go) Other comprehensive income for the year a9 15 (08) “a2 ~Bank of Scotland (Ireland) Limited Notes to the financial statements 9, Loans and advanees to banks Bank 2009 2008, €m €m Placements with banks 593 2,049 Securities purchased under agreements to resell = 1,406 393 3.455, Company 2009 2008 €m ém 655 2,047 — —1.406_ —_ 3.453 Loans and advances to banks are measured at amortised cost on the Balance Sheet. The fair value of loans and ‘advances to banks is disclosed in note 28, At 31 December 2009, loans and advances to banks included amounts with LBG undertakings of €0.6bn (2008: €3.4bn). 10. Loans and advances to customers Bank 2008 €ém Gross loans and advances to customers 32,618 Impairment provisions (note 11) ay, Net loans and advances to customers, 28,665 31,907 Company 2009 2008 €m ém 32,693 32,625 3,978) 709} 28,714 “31,916 Loans and advances to customers include advances securitised under the Bank’s securitisation programme as part of a sale and repurchase agreement (see note 12). ‘The Bank’s primary market is Ireland and the UK, and exhibits a material concentration in the construction and property industry sector and in residential mortgages. Industry sector Agricultuee, forestry and fishing Energy Manufacturing industry Construction and property Wholesale/retal trade and repairs Hotels and restaurants ‘Transport, storage and communication Financial Other services Individuals Home mortgages ‘Other personal lending Geographical analysis Ireland UK Europe Rest of the world Impairment provisions (note 11) Net loans and advanees to customers “The fair value of loans and advances to customers is disclosed in note 28. Bank 2008, €m 136 1 979 13,219 2,202 2,338 173. 420 2,418 8,805 1,251 32,618 29,322 3,045 246 32,618 (uy 31,907 43Bank of Scotland (Ireland) Limited Notes to the financial statements 10. Loans and advances to customers (continued) ‘The table below provides a residual maturity analysis of loans and advances to customers for the Bank and ‘Company. Bank Company 2008 2009 2008 €m €m €m « greater than 5 years 18,722 18,027 20,615 = within 1 to 5 years 5,356 4,646 6,985 = within 3 months to 1 year 4535 217 3,581 Jess than 3 months but not on demand 3,841 7383 1,679 = on demand 164519 165 Gross loans and advances 32,618 32,692 33,025 Impairment provisions ay G,978)_ (709) Net loans and advances 3907 28,714 31916 Loans and advances to customers include finance leases with a carrying amount of €274m (2008: €347m) analysed as follows: Bank Finance lease receivables 2009 2008 €m ‘€m Gross investment in finance receivables: = greater than 5 years 8 10 = within 1 t0 5 years: 219 316 within 1 year ose: 296 382 Less unearned finance income ___ @) G5) Present value of minimum lease payments 274 347 ‘Analysed as: —_ ~ greater than 5 years 7 10 = within 1 05 years 203 286 = within 1 year 64 51 Finance lease receivables 216s ees ‘At 31 December 2009 and 2008 the Bank had no unguaranteed residual values accruing to its benefit, At 31 December 2009, total accumulated allowance for uncollectible minimum lease payments receivable amounted to €75m (2008: €22m). The Bank’s principal leasing activities ae in plant and machinery leasing and instalment creditBank of Scotland (Ireland) Limited Notes to the financial statements 11. Impairment losses on loans and advances to customers Impairment provisions Bank ‘Company 2009 2008 2009 €m €m Atl January m 189 709 ‘New impairment provisions less releases 3,286 592 3,280 Amounts written off (3) 23) 03) Foreign exchange and other movements 2 ©). 2 At31 December 7 3978 Impairment losses Bank 2009 2008, 2009 2008 ém &m &m €m ‘New impairment provision less releases 3,286 553 3,280 553 Recoveries of amounts previously written off = : o : 1 Net charge to Income Statement 3286, [Se ee] 352. 12. Securitisation “The Company engages in securitisation transactions of its residential mortgage loans. In a securitisation transaction, the assets or interests in the assets are transferred to a special purpose entity (SPE) which then issues liabilities to investors. Securitisations may, depending on the individual arrangement, result in continued recognition of the securitised assets or de-recognition of the assets and a separate recognition, as assets or liabilities, of any rights and obligations created or retained in the transfer. The Bank’s securitisation vehicles Wolfhound Funding 2008-1 Limited and Wolfhound Funding 2 Limited have issued notes to the Company in respect of residential mortgage assets acquired. ‘The Company has used these hotes under sale and repurchase contracts with the relevant monetary authority as described in note 19. The table below sets out the carrying amounts of the assets securitised and the associated liabilities 2009 2008 €m €m Gross assets securitised = residential mortgages 7335 4276 ‘Notes in issue 7,407 4,126 Subordinated debt 909, 190 ‘As the securitisation resulted in the continued recognition of the securitised assets on the Company Balance Sheet, ‘gross assets securitised” are included within loans and advances to customers (note 10) whereas ‘notes in issue’ and ‘subordinated debt’ are both included within investment securities in the Company Balance Sheet (note 13).Bank of Scotland (Ireland) Limited Notes to the financial statements 13. Investment securities Bank Listed €m Debt securities -Designated as fair value through income statement ‘ = Available for sale Total ity shares -Designated as fair value through income statement : ‘Available for sale 3 ‘Total 3 ‘Total investment securities 1,512 Company Listed €m Debt securities -Designated as fair value through income statement : - Available for sale 1,509 = Loans and receivables 7.407 Total 8,916 Equity shares -Designated as fair value through income statement = Available for sale 3 Total 3 ‘Total investment securities 3919 Unlisted €m —i0 >} Foal a 20 ne €m 15 909 4 a 2B i547 2009 ~ Unlisted Total €m 1,524 8316 9,840 4 7 ie 9851 eee oes eee) Listed Unlisted ‘Total €m &m €m 5 6 1,810 1,839 1815 1,845 - 4 6 2 6 31 isle Se ens 76. [iauaaetioas aes essa] Listed Unlisted ‘Total €m €m €m 1 29 1,839) 190 4316 219 6,156 : 4 4 6 20 26 6 24 30 5943 243 6186 Investment securities held as available for sale and designated at fair value through Income Statement are recorded at fair value. The positive fair value movement on available for sale investment securities during the ‘year was €80.7m (2008: negative €79.5m) and the negative tax effect was €10.1m (2008: positive €9.9in) Tesulting in a net movement of €70.6m (2008: €69.6m). The fair value of investment securities is disclosed in note 28. Included in the Bank’s investment securities at 31 December 2009 are provisions of €73m (2008: €50m) with €23m (2008: €39m) recorded in the Income Statement with €912m at 31 December 2009 (2008: €1,039m) subject to sale and repurchase agreements. Included in the Company's investment securities is €5,910m at 31 December 2009 (2008: €5,009m) subject 10 sale and repurchase agreements,Bank of Scotland (Ireland) Limited Notes to the financial statements 14. Interests in jointly controlled entities Bank 2009 2008, €m €m At LJanuary 13 3 “Attributable (1oss)/profit retained @ 6 ‘Changes in fair value in available for sale investments QQ __o& At31 December [EEE] 13 2009 2008 ‘The Banks share of jointly controlled entities includes the following: €m ‘€m Current assets Z 7 Non-current assets n 24 Current liabilities Z a ‘Non-current liabilities ) 11 Equity 9 3B Income 2 1 Expenses (4a) G) Net loss 2) @ ‘The fair value of investments in jointly controlled entities, which are listed and where quoted prices are available, amounts to €0.4m (2008: €0.5m). Losses in jointly controlled entities have been recognised against investment loans advanced to the jointly controlled entities, in the amount of €17.8m (2008: €17.6m). ‘There are no commitments in respect of jointly controlled entities at 31 December 2009 and 2008, other than the Bank's undrawn commitment of €0.5m (2008: €0.5m ) of which, €0.3m (2008: €0.3m) was to the ICC Private Equity Fund and €0.2m (2008: €0.2m) to the ICC Private Equity Parallel Fund, “Jointly controlled entities, Natureof business Proportion Reporting date of ownership of financial statements Incorporated in Ireland ICC Venture Capital Fund Investment holding 310 ICC Sofware Fund No, 2 Investment holding, 31 Dec ICC Private Equity Fund Investment holding, 31 Oct ICC Regional Venture Capital Fund Investment holding 31 Dec ‘Brooklyn Properties Limited Property development 31 Dec Incorporated in UK Hillview (Watford) Limited Property development 50 31 Dee 15. Interests in subsidiary undertakings Company 2009 2008 €m €m At cost at | January 179 196 “Attributable loss retained - (ao) Moverent to investment securities : 6) Impairment losses on interests in subsidiary undertakings 62) 2 Foreign exchange movement i _@)_ ‘At cost at 31 December 148 179Bank of Scotland (Ireland) Limited Notes to the financial statements 15. Interests in subsidiary undertakings (continued) Principal subsidiary undertakings Details of the Company's principal subsidiaries at 31 December 2009 are as follows Proportion of Name of subsidiary ownership Principal Business BOS (Ireland) Financial Services Limited 100% Leasing Finance BOS (Ireland) Funding ple 100% Debt issuance BOS (Ireland) International Finance Limited 100% International Financial Services BOS (Ireland) Property Services Limited 100% Property Services, ICC Holdings 100% Investment Holding ICC International Finance Limited 100% International Financial Services ‘Omnistone Limited 100% Property Services Thistle Finance Limited 100% Leasing Finance Upsaala Limited 100% Property Services Wolfhound Funding 2008-1 Limited 0% Securitisation vehicle Wolfhound Funding 2 Limited 0% ‘Securitisation vehicle {All subsidiaries ate incorporated in Ireland and have a financial statement reporting date of 31 December, {In the Company financial statements, investments in subsidiaries are accounted for at cost less provision for impairment. The Bank's interest in Wolfhound Funding 2008-1 Limited and Wolfhound Funding 2 Limited is, in substance, no different from if it was a wholly owned subsidiary undertaking and as a result it is consolidated into the Banks financial statements. 16. Investment properties Bank Company 2009 2008 2009 2008 €m én €m ém At 1 January 5 - 1 Changes in fair value @ A - : ‘Transfer from property and equipment (note 18) - 5 1 At31 December Ss 5 an Investment properties are carried at their fair value as determined by independent qualified surveyors having recent experience in the location and category of the property being valued. Fair values were determined having regard to recent market transactions for similar properties and movements in relevant property indices. No rental income or expenses arise in respect of the above properties. The properties were initially acquired ‘with a view to subsequent disposal and were classified as property and equipment. As disposal did not take place within three years the properties were reclassified to investment properties in line with the Bank's ‘accounting policy. “48Bank of Scotland (Ireland) Limited Notes to the financial statements 17. Goodwill and other intangible assets 2009 Goodwill €m Cost Atl January 2009 24 Impairment losses 4) Additions At31 December 2009 as Amortisation At | January 2009 - ‘Amortisation charge for the year ‘At 31 December 2009 Carrying value at 31 December 2009 2008 Goodwill €m Cost ‘At | January 2008, 4 Additions - Reclassification At 31 December 2008 24 Amortisation ‘At | January 2008 ‘Amortisation charge for the year Reclassification from property & equipment (note 18) : ‘At31 December 2008 Carrying value at 31 December 2008 34 Bank Other intangible assets €m 86 = Total €m 101 31 ‘Company Other intangible assets €m 45 ‘Company Other intangible assets €m 30 10 5 a5 24 ‘As at'31 December 2009 and 2008 there were no contractual commitments for the acquisition of software, In light of the current financial performance and the reduced profit outlook for the asset finance business over the planning horizon, the Bank has taken a full write-down of €24m in respect of the carying value of the goodwill asset related tothe Bank’s acquisition of Smurfit Finance Limited in 1999. “49Bank of Scotland (Ireland) Limited Notes to the financial statements 18. Property and equipment 2009 - Bank Property Equipment Total én €m &m Cost AUT January 2009 u 1 2 ‘Additions : 2 Disposals : 0 ‘Transfer between property and equipment Oe - ‘AC31 December 2009 6 7 z Depreciation ‘AUT January 2009 3 u 37 Depreciation charge for year 7 8 8 Disposals a. At31 December 2009 a Carrying value at 31 December 2009 36 3 2008 - Bank Property Equipment Total ém €m ém Cost ‘At I January 2008 2 37 80 ‘Additions - lu 7 Dispos a 2 e (10) ansfer 1 investment property (note ) - [A31 December 2008 i 7 82 Depreciation ‘Atl January 2008 3 30 3 Depreciation charge for year 1 9 10 Disposals o ® 6) Reclassification to goodwill and other intangible assets (note 17) At 31 December 2008 —s 34 Carrying value at 31 December 2008 OS 50Bank of Scotland (Ireland) Limited Notes to the financial statements 18. Property and equipment (continued) 2009 - Company Property ‘Equipment Total €m €m €m Cost ‘ALL January 2009 8 67 1 Additions - 2 2 Disposals - a o Transfer between property and equipment 4 A 31 December 2009 2 Depreciation ‘At January 2009 2 B 35 Depreciation charge for year : 7 7 Disposals L a ‘At 31 December 2009 2 aaa 4. Carrying value at 31 December 2009 3 2008 - Company Property Equipment Total €m €m €m Cost At January 2008 10 37 or Additions : 2 2 Disposals w @ @ “Transfer to investment property (note 16) @ Uy AC31 December 2008 8 a 75 Depreciation ACI January 2008 Depreciation charge for year Disposals. At31 December 2008 Carrying value at 31 December 2008 ‘The owner occupied property, acquired by way of finance lease, is stated at the amount equal to the lower of its fair value and the present value of minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. ‘At 31 December 2009, the Bank has no commitments in respect of the acquisition and fit-out of property (2008: Nil). stBank of Scotland (Ireland) Limited Notes to the financial statements 19. Deposits by banks Bank Company 2009 2008 2009 2008 All interest bearing én ém €m ém Repayable on demand 166 351 166 351 Securities sold under agreements to repurchase 5,062 5,661 5,062 5,661 Other deposits by banks with agreed maturity dates 19,586 22.352, _19,586._22,352. 345146 28366 2a.pi4 28,364 Deposits by banks are measured at amortised cost with €24.4bn maturing in less than | year (2008: €27.3bn). ‘The fair value of deposits by banks is disclosed in note 28. “The Bank has developed significant pools of eligible collateral from its Balance Sheet which is capable of being pledged in the secondary market and through the normal market operations of the Monetary Authorities to provide access to secured funding, |At31 December deposits by banks included amounts with LBG undertakings of €19.6bn (2008: €22.3bn). 20. Deposits by customers Bank Company 2009 2008 2009 2008 €m ém €m €m Analysed by remaining maturity: « greater than 5 years 8 6 8 6 + within 1 to 5 years| 263 8 263 93 = within 3 months to 1 year 444 2.013 444 2,013 “Jess than 3 months but not on demand 2,658 4179 2,658 4,179 on demand 615 319 9.251 4,905 3,988 6610 12,624 11196 Included within the Company deposits by customers are intercompany balances with Bank companies amounting to €8.6bn (2008: €4.5bn) which are repayable on demand, 21, Debt securities in issue [As at December 2009 the Bank has €8m (2008: €57m) of debt securities in issues, which consists of Commercial paper issued by Thistle Finance Limited. As at December 2008, there was €57m of debt securities fn issue, of which Thistle Finance Limited had issued €19m of commercial paper and BOS (Ireland) Commercial Finance Limited had issued €38m of commercial paper. ‘All debt securities in issue relate to unlisted commercial paper measured at amortised cost. The fair value of debt securities in issue is disclosed in note 28 and the expected maturities in note 32. 22, Other borrowed funds Bank & Company 2009 2008 €m ém Subordinated liabilities: eae 335 348 uate 303 Total a oHBank of Scotland (Ireland) Limited Notes to the financial statements 22, Other borrowed funds (continued) Dated subordinated liabilities 2009 2008 €m €m Scotland Intemational Finance No | BV(@M Euribor + 65bps) 3008/09 5 Scotland Intemational Finance No | BV(GM Euribor + 65bps) 17108109 : 6 Scotland International Finance No | BVM Euribor + 67bps) 2ui2no 4 4 Scotland international Finance No | BV(3M Euribor + 67bps) 3108/10 1 7 ‘Scotland Intemational Finance No | BV(@M Euribor + 67bps) 3107/11 3 5 BNP Paribas (fixed 6.25%) ‘ogios/i2 Bb B HBOS ple (3M Euribor + 67bps) 0sio73 76 n Scotland Intemational Finance No 1 BV(GM Buribor + 100bps) 2ai06n18 30 0 HBOS ple (3M Euribor + 100bps) 23/1218 75 6 HBOS ple(3M Euribor + 100bps) 50/09/19, 35 35 HBOS ple(3M Eusibor + 85bps) 30109120 0 70 335 mn Undated subordinated liabilities (all variable) 2009 2008 én én Scotland Intemational Finance No 1 BV(GM Euribor + 91bps) 4 5 Scotland Intemational Finance No} BVGM Euribor + 9tbps) 3 3 Scotland Intemational Finance No 1 BV(3M Euribor + 91bps) 4 4 ‘Scotland International Finance No | BVM Euribor + 91bps) 1 1 Scotland Intemational Finance No | BVGM Euribor + 91bps) 2 2 Scotland Intemational Finance No | BV(GM Euribor + 91bps) 5 3 ‘Scotland Intemational Finance No | BV(3M Euribor + 100bps) 5 3 HBOS plc(3M Euribor + 190bps) 2 3 HBOS ple(3M Euribor + 190bps) 6 ry HBOS ple(3M Euribor + 140bps) 30 30 HBOS ple(3M Euribor + 140bps) 200. a Mat canoe ss No repayment of principal, for whatever reason, of dated subordinated liabilities prior to its stated maturity and rho repurchase by the relevant entity of its subordinated liabilities, may be made without the consent of the Financial Regulator. The Bank cannot exercise any redemption option or purchase any of its undated subordinated liabilities without the consent of the Financial Regulator. On a winding up of the Company or any of the Bank's subsidiary undertakings, the claims of the holders of dated and undated subordinated Fiabiltes shall be subordinated in right of payment to the claims of all ‘depositors and ereditos of the Company or Bank's subsidiary undertakings other than creditors whose claims. fre expressed to rank pari passu with or junior to the claims of the dated and undated subordinated liabilities. ‘Any undated subordinated liabilities are junior in point of subordination to the dated subordinated liabilities referred to above. ‘All undated subordinated liabilities and the majority of dated subordinated liabilities are held with LBG companies.Bank of Scotland (Ireland) Limited Notes to the financial statements 23, Lease commitments Bank Company 2009 2008 2009 2008 €m €m €m €m Non-cancellable operating lease rentals are payable as follows: + greater than 5 years 218 2 n 1m = within 1 to 5 years| 58 19 20 + within 1 year 15 5 4 21 306 36 98 Included in the above is €3.7m (2008: €13.6m) in respect of payments expected to be received upon expiration of sub leases. 24. Deferred taxation Bank Company 2009 2008 2009 2008 €m €m €m €m Deferred taxation liabilities : ay . . Deferred taxation assets 2 a2 2 40 Net deferred taxation assets 2 41 oe soma! ‘The movement for the year in the Bank’s and Company’s net deferred taxation position is as follows: Atl January 4a "7 40 a Credit/(charge) to income for the year (Oy 9 ray a Crediv/(charge) to equity for the year ay 15 ay 6B Other movernents a) a ‘At31 December iz a eee In accordance with its accounting policies, the Bank has not recognised a deferred tax asset of €380m due to ‘uncertainty as to the availability of adequate taxable profits in the foreseeable future except to the extent that the deferred taxation asset relates to the fair value measurement of available-for-sale investments and defined benefit pension schemes charged or credited to equity. [Analysis of deferred tax assets Bank Company 2009 2008 2009 2008 ém €m €m €m Availabe forsale investments 3 B 4 B Employee benefits 5 6 4 é Tax losses caried forward 7 n : u Provisions write-downs in fair value 4 4 4 4 Other 8 : 6 Deferred tax assets 2 a 2 ao ‘The Bank has no deferred tax liabilities as at 31 December 2009 (2008: €1m, which was property related). stBank of Scotland (Ireland) Limited Notes to the financial statements 25. Commitments and contingencies ‘The contractual amounts below indicate the volume of business outstanding at the balance sheet date in respect of contingent liabilities and commitments undertaken with customers. They do not reflect the underlying credit ‘and other risks, which are significantly lower as some facilities are unlikely to be drawn and some facilities that ‘are drawn will be supported by collateral. Bank & Company 2009 2008 én ém Contingent liabilities ‘Acceptance and endorsements 2 . Guarantees and assets pledged as collateral security ~ guarantees and irrevocable letters of credit 265 a9. ieaize7e a2 Commitments Un-drawn formal standby facilities, credit lines and other commitments to lend: = up to and including | year 766 1,235 over | year 5 7 7 1235 ‘Total commitments and contingent liabili 1038" _16857_ Contingent assets ‘Amounts withheld by purchasers from the consideration for investments disposed of and held in escrow as security against unforeseen liabilities or claims were €0.1m at 31 December 2009 (2008: €2.3m). 26. Share eapital Bank & Company 2009 2008 2009 2008 Number in Number in Value Value millions millions én €m Authorised At | January and 31 December 400 400 508 508 Allotted, called up and fully paid ‘ACI January im 121 218 153 Consideration for issue of ordinary shares 185 51 235 65 At31 December 357 17, 453 218 ‘On 30 June 2009, the Bank issued 47,912,389 shares for a total cash consideration of €700m comprising nominal consideration of €61m and a premium of €639m. On 17 December 2009, the Bank issued 136,892,540 shares for a total cash consideration of €2,000m comprising nominal consideration of €174m and 2 premium of €1,826m. ‘The ordinary shares were issued at a nominal value of €1.27 per shareBank of Scotland (Ireland) Limited Notes to the financial statements 27. Derivative assets and liabiti ‘The Bank uses interest rate swaps, forward foreign exchange contracts and other derivative instruments to hedge ‘and reduce the interest rate and currency exposures that are inherent in any banking business. The hedge accounting strategy being adopted by the Bank under IAS 39 isto utilise a combination of macro and micro fair Value hedge approaches. Some derivatives are held for economic hedging purposes and where these do not eet the criteria for hedge accounting as defined under IAS 39 they are accounted for in the same way as derivatives held for trading, ‘Notional principal amounts represent the value of the contract to which the derivatives relate and are provided to assist with comparison to the financial instruments held on the Balance Sheet, The Bank uses derivatives for hedging purposes to mitigate the market risk exposures arising from its banking and other activities Bank & Company 2009 Contract / Fair value Fairvalue notional asset. liability amount €m €m ém Derivatives held for trading: Exchange rate related contracts Forward foreign exchange 1 a 6 Interest rate related contracts Interest rate swaps 2 (22) m2 Forward rate agreements : : 5233 Options — 3) 38 ‘Total derivatives held for trading 26 26) 6.049 Derivatives held for hedging: Derivatives designated as fair value hedges of loans and deposits Interest rate swaps 4 (a2) 4978 Options = : 91 ‘Total derivatives held for hedging 4 © 06" Total derivative assets/(liabilites) 30 154 11,118 2008 - Bank Contract / Fair value Fair value notional asset amount €m €m Derivatives held for trading: Exchange rate related contracts Forward foreign exchange 4 6) n Interest rate related contracts Interest rate swaps 18 an 863 Forward rate agreements 1 @) 7,425 Options Q) 127 ‘Total derivatives held for trading 3), 8487 Derivatives held for hedging: Derivatives designated as fair value hedges of loans and deposits Interstate swaps 4 _ Options : » Total derivatives held for hedging + a8) “otal derivative assts(iabiliis) DoBank of Scotland (Ireland) Limited Notes to the financial statements 27. Derivative assets and liabilities (continued) 2008 - Company Contract / Fair value Fair value notional asset liability amount €m €n €m Derivatives held for trading: Exchange rate related contracts Forward foreign exchange 4 8 n Interest rate related contacts Interest rate swaps 18 an 363 Forward rate agreements 2 6) 7425 Options 2 2) 127 Total derivatives held for trading, 26 @5) 8487 Derivatives held for hedging: Derivatives designated as fair value hedges of loans and deposits Interest rate swaps 3 (102) Options : ‘Total derivatives held for hedging 3 (02) Credit risk analysis Counterparties of the Bank's derivative transactions are primarily financial institutions. An institutional and {geographical analysis of replacement cost of derivative assets, based on the location of the office writing the business, is shown below: 2009 2008 ém em Institutional Financial instittions 5 Non-financial institutions on 4 — __ Geographical Ireland 7 = United Kingdom 7 3 Rest of world 5 ae See stBank of Scotland (Ireland) Limited Notes to the financial statements 28. Fair value of financial instruments aad Acai value broth qyaabe or sale morte cost Carrying. Carrying Carrying ‘As at 31 December 2009 ‘amount Fairvalwe amount Fair value amount Fair value em em em em en ‘em Financial assets Cash and balonees at Central Bank : : . : as os Derivative assets 0 x0 : : : a Investment securities Debt securities . : 13241528 : : “Bauity shares 4 4 9 ” : Loans and advances to banks : : : a aS Loans and advances to customers : : : : mee ane Other assets : es et ss 15s Boe 75713 Financia Kailities Derivative Fbilites 184 10 - : i Deb securities in issue : : 5 : : . Deposits by banks : : : : 24816 24,814 Deposits by estomers : : : : oon on Other borrowed finds : : : a Other habilies a isa rr} Des Company disclosures are consistent with the analysis above with the exception of investment securities, where €8316m (2008: €4,316m) is recorded as loans and receivables, having a fair value of €4,940m (2008:€4,121m). Fair values of financial assets and financial liabilities are based on market prices where available, or estimated ising other valuation techniques. Where they are short-term in nature or re-pice frequently, fair values approximates o carrying value. Bank At far value through femoeeenees Available for sale Amortised cost Carrying Carrying Carrying As at 31 December 2008, amount Fair value mount Fair value ‘amount Fair value em ém €m én én én Financial assets Cash and balances at Central Bank a a . on on Derivative assets 29 » : : - Investment securities = Debi securities 6 6 18391839 . : Equity shares 4 4 2 2 E é ‘Loans and advances to banks . : : : 34853485 [Loans and advances to customers : : : ‘907 30.685 Other assets a 39 3» 1866 Financial abilities Derivative liabilities 143 43 7 : . Debs securities in issue : : SS a Deposits by banks : : : 28,364 28,364 Deposits by customers : : : z eo Gell Other borrowed funds : 7 : : ‘691 663 (Other HabilitiesBank of Scotland (Ireland) Limited Notes to the financial statements 28. Fair value of financial instruments (continued) “The main methodologies and assumptions used in estimating the fair values of financial instruments are + Financial assets and liabilities at fair value through Income Statement: The fair values of quoted investments in active markets are based on current bid prices. Where there is no active market, fair value js established using valuation techniques. Where current prices are not available, the price of the most recent transaction provides evidence of the current fair value, adjusted for changes in economic circumstances. Valuation techniques also include the use of recent market transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. + Derivatives: Derivative fair values are determined by using valuation techniques that are consistent with techniques commonly used by market participants to price these instruments. These techniques included discounted cash flow analysis and other pricing models. The fair values calculated from these models are regularly compared with prices obtained in actual market transactions to ensure reliability. In all material instances these techniques use only observable market data. Loans and advances to banks, loans and advances to customers, deposits by banks and customer accounts are not regularly traded and so market prices are not available. = Loans and advances to customers: The fair value of loans and advances is estimated by discounting anticipated contractual cash flows at current market interest rates. Current market rates are derived by reference to the rates at which similar products are currently priced and after taking account of significant changes in eredit spreads. = Loans and advances to banks and deposits by banks: For loans and deposits with variable interest rates the fair value is represented by the carrying value as these products are at an administered rate that ‘can immediately be re-priced. The fair value of fixed interest bearing deposits is based on cash flows. discounted using currency money market interest rates for debts with similar maturity and credit risk characteristics. © Cash balances at Central Bank and items in course of collection: The carrying amount of such monetary assets reflects fair value. + Customer accounts and subordinated liabilities: The fair value of customer deposits with no stated maturity dates is the amount repayable on demand. The estimated fair value of fixed interest bearing deposits and other borrowings with no quoted market price is calculated using a cash flow model discounted using interest rates for debts with similar maturity. © Investment securities: Fair value is based on market prices or broker/dealer valuations. Where this information is not available, fair value has been estimated using quoted market prices for securities with similar eredit, maturity and yield characteristics. + Debt securities in issue: Debt securities in issue are held at amortised cost. They are initially recognised at fair value plus directly related costs and are subsequently carried on the Balance Sheet at amortised cost using the effective interest method. + Trade and other assets/liabilities: For receivables and payables with a remaining life of less than one ‘year, the notional amount is deemed to reflect the fair value. The fair values of all other receivables and payables are calculated by discounting future anticipated cash flows, Fair values are calculated based on quoted market prices. Where quoted market prices are not available, a cash flow mode! is used discounted using an appropriate current yield curve for the remaining term to maturity. —sBank of Scotland (Ireland) Limited Notes to the financial statements 29, Financial assets and liabilities carried at fair value by valuation method, Financial instruments at fair value through the Income Statement, available for sale financial assets and derivatives held for hedging, including those in economic hedges, are recognised and measured at fair value, “The table below shows financial instruments carried at fair value by valuation method. Bank Levelt Level? Valuation techniques ‘As at 31 December 2009 Quoted prices based on in active observable markets market data Financial assets én én Ut fair value through the Income Statement - designated upon intial recognition: Investment securities Debt : “Equity : : “Available for sale financial assets “Debt investment securities 1,508 7 “Equity investment securities 3 Derivatives assets ~ designated as held for. “Trading : %6 “Hedging : 4 Financial liabilities Derivatives liabilities - designated as held for: Trading 26 sHedzing : 18 an Level Level Valuation a techniques ‘As at 31 December 2008 Quoted prices tered on inetive absereabie fuorkots market data Financia assets én €m ‘Atfair value through the Income Statement - designated upon inital recognition: Investment securities “Debt 5 i Equity : 4 Available for sale financial assets: Debt investment securities 1,810 Equity investment securities 6 : Derivatives assets - designated as held for: Trading - 2s “Hedging, : 4 Financial Habilities Derivatives liabilities + designated as held for “Trading : 25 “Hedging, : ns Level Valuation techniques incorporating inform: 15 6 Level Valuation techniques incorporating Information other ‘than observable market value ém 29 21 Total €m 1524 19 6 108 Total 1,839 7 25 8 60Bank of Scotland (Ireland) Limited Notes to the financial statements 29. Financial assets and liabilities carried at fair value by valuation method (continued) Level Financial instruments valued using unadjusted quoted prices in active markets for identical instruments. This category includes listed equity shares, exchange-traded derivatives and government securities, Level? Financial instruments valued using techniques based on observable market data Instruments inthis category are valued using a Quoted prices for similar instruments or identical instruments where the markets are considered to be less active; or b. Valuation techniques where all the inputs that have a significant effect on the valuation are directly or indirectly based on observable market data Financial instruments in this category include certain unlisted equity shares for which recent market data are available, the majority of the Group’s over the counter derivatives and certain instruments listed in (1) above where markets are considered to be less than active. Lovel 3. Financial instruments valued using valuation models that include non-market observable inputs. These models tuse observed issuance prices, benchmarking methodology and modelled market correlations. Movement in Level 3 items During the year ended 31 December 2009, €22.5m of an impairment charge was recorded relating to investments categorised as Level 3 (2008: €39-4m). Additionally fair value movements of €1.2m (2008 2.1m) were recorded in other comprehensive income relating to available for sole investment securities designated as Level 3.Bank of Scotland (Ireland) Limited Notes to the financial statements 30. Credit risk ‘The Bank's approach to managing credit risk is set out on pages 9 to 11 of the Risk management review. Individual Company analysis has not been provided, as the disclosures are not materially different to the Bank disclosures. Financial instruments subject to credit risk ‘The table below sets out the Bank's maximum exposure to credit risk relating to financial instruments before taking account of collateral and other security. Assets 2009 &m Cash and balances at Central Bank 785 Derivative assets 30 Loans and advances to banks $93 Investment securities = Debs securities 1,524 Loans and advances to customers Commitments and contingent liabilities 1,036 Total 32,633 Cash and balances at Central Bank “The Bank does not have material credit exposure from the balances it holds with the Central Bank. Derivative assets, loans and advances to banks and debt securities 2008 ém 673 29 3,435 1,845 31,907 37,909 1,657 aoe: Where extemal credit ratings are available, these have been used in the table below, to analyse the credit profile of these portfolios: 2009 AA A BBB Unrated €m €m €m ‘€m Derivative assets - 5 : 25 Loans and advances to banks (b) 4 585 © Investment securities = Debt securities 305 1,162 2 1s 2008 AA A BBB Unrated €m ém €m ‘€m Derivative assets 6 7 2B Loans and advances to banks (b) 3,422 28 : 8 Investment securities Debt securities 1,050 153, 21 1s @) © @) ©) Total €m 30 593 1,524 Total €m 29 3,455 1,845 (2) The Bank does not have a trading portfolio. The derivative assets highlighted above relate to a number of individual customer transactions, which have been hedged on a micro basis with BOS ple, thus an equal but opposite liability with BOS ple is reported in derivative liabilities. (b) Loans and advances to banks are primarily invested with LBG (99%) or banks with a eredit rating of A” or above, (© Balances awaiting’clearing, 6 ~Bank of Scotland (Ireland) Limited Notes to the financial statements 30. Credit risk (continued) Loans and advances to customers ‘The table below summarises the Bank’s loans and advances to customers over the following categories: “neither past due nor impaired”, “past due but not impaired” and timpaired’, The commercial real estate (‘CRE") portfolio consists of the Bank's property development and property investment assets. The corporate and Commercial (‘Commercial’) portfolio consists of the trading businesses, high net worth lending along with ‘motor and commercial asset finance. 5009 Commerciat CRE Residentit Total Mortgages &m €m ‘em &m ‘Neither past due nor impaired 6.468 5,366 a8 19,552 Past due but not impaired 786 955 298 2359 Impaired loans 3,432 6,834 594 _ 10,860 10,686 13,155 Ta10 32,681 ‘Specific impairment (1,047) (1,873) (26) (2,946) Collective Impairment 324) 506 _ci0) 1,040) asm) e379) (@36) @.986) Net loans and advances to customers 93180776 RST 2 mr] Commercial CRE Residentiat Totat Mortgages €m €m &m em Neither past due nor impaired 9,395 loss 8,176 2012 Past due but not impaired 8 789 446 2.013 Impaired loans oe ei TL3z T2301 05 6 Specific impairment isn, (33) ® (22) Chiletive impairment en ie (270) (416) Qs) uy [Net loans and advances to customers ———T0. 13085. 8,780 31507 ‘At31 December 2009, 60% of gross loans and advances to customers were classified as ‘neither past due nor impaired” (31 December 2008: 86%). The decrease in the year reflects the severe property market downtum and the impact of the recessionary market conditions in the economy in general “The Bank monitors lending asset quality on an ongoing basis using the rating categories outlined below. These ratings provide a common and consistent framework for aggregating and comparing exposures across all lending portfolios: © Better than satisfactory risk applies to customers with a strong credit profile including such characteristics as low debt to value, good trading performance and strong management, + Satisfactory risk applies to customers who are performing as expected. + Viable but monitoring applies to customers with increased risk profiles that are subject to closer ‘monitoring and scrutiny by lenders with the objective of managing risk and moving such accounts to ‘an improved rating category. + High risk applies to customers where material liquidity difficulties are emerging and/or financial leverage is deteriorating with the case being temporarily transferred to a specialist work out unit,Bank of Scotland (Ireland) Limited Notes to the financial statements 30. Credit risk (continued) ‘The tables below provide an analysis of gross loans and advances to customers that are neither past due nor impaired, by asset class, based on an assessment of the credit quality of the borrower. 2009 Commercial CRE Residential Total Mortgages é em €m &m Better than satisfactory risk 1,048, 390 41 6369 Satisfactory risk 3,002 2,325 V3 7200 Viable but monitoring 2270 951 418 3639 High risk 148 1,300 826 2374 868 3366 7718 19,552 2008 Commercial CRE Residential Total Mortgages €m €m én ém Better than satisfactory risk 1,597 2611 6132 10,340 Satisfactory risk 6199 5,430 1390 15019 ‘Viable but monitoring 1,503, 1358 245 3,106 High risk 94 oaa 409 1,547 10,443, 8176 28,012 During 2009 the Bank aligned its credit rating policy with LBG which resulted in the restatement of 2008 gross Toans and advances to customers that are neither past due nor impaired as detailed in the table below, 2008 2008 €m €m as restated Better than satisfactory risk 10,340 9,193 Satisfactory risk 13,019 14343 ‘Viable but monitoring, 3,106 3,456 High risk _1547_ 1,020 28,012 28,012 ‘The tables below provide an aged analysis of gross loans and advances that are past due but not impaired by asset class. 2009 Residential Commercial CRE Mortgages Total em em én em Upto 30 days 336 uy 747 30-60 days 2 252 735 ayes ow 129 731 736 a8 2239) 2008 (as restated) Residential Commercial CRE Mortgages Total én em ‘én ém Up to 30 days 365 248 272 885, 30 60 days 246 430 129 803 60-90 days es 325 778 789 a6 Z013 ——Bank of Scotland (Ireland) Limited Notes to the financial statements 30. Credit risk (continued) Restatement of 2008 past due and impaired Past due but not impaired refers to all loans where contractual interest or principal payments are past duc, but where there is no objective evidence of impairment. In previous years, the definition of impaired loans referred to all loans that require an impairment provision, together with loans that are not individually significant and have arrears greater than 90 days. ‘To align with LBG credit policies, the definition of impaired loans was changed during 2009 to include in impaired any loan ‘which had arrears greater than 90 days, regardless of whether it is has a provision or not. “The table below outlines the impact of such restatement: Bank 2008 2008 €m €m as restated Loans and advances that are past due but not impaired 2,013 2,758 Impaired loans 2,593 1.848, 4,606. 4.606. Included in loans and advances that are neither past due nor impaired are €686m (2008: €2,043m) of restructured loans that would have been past due or impaired had their terms not been renegotiated. Collateral and other eredit enhancements held Financial assets that are past due or individually assessed as impaired may be partially or fully collateralised or ‘subject to other forms of credit enhancement, [Assets in these categories subject to collateralisation are mainly commercial lending and residential mortgage loans. For commercial lending, security may be in the form of floating charges where the value of the collateral varies with the level of assets such a inventory and receivables held by customer. For these and other reasons Collateral given is only accurately valued on origination of the loan or in the course of enforcement actions and fa. a result it is not practicable to estimate the fair value of the collateral held. ‘A description and the estimated fair value of collateral held in respect of residential mortgage loans that are past ‘due or individually assessed as impaired was as follows: 2009 2009 2008 2008 Carrying, Fair Carrying Fair value value value value &m €m €m €m Nature of assets Residential property 1,092 Lan 629 1016 Collateral included in the above table reflects the Bank’s interest in the property in the event of default. Fair value is determined by indexing the original valuation of the property to reflect market conditions.Bank of Scotland (Ireland) Limited Notes to the financial statements 30. Credit risk (continued) Repossessed collateral During 2009 the Bank obtained assets as a result of the enforcement of collateral held as security, as follows: 2009 2008 Carrying Carrying Nature of assets €m €n Residential property 2 1 ‘Commercial property 12 1 Total 14 ‘The Bank does not use repossessed assets in its operations. Assets obtained are normally sold, generally at auction or realised in an orderly manner, to settle indebtedness of a borrower. Where the Bank acquires legal title to the relevant secured properties, under its mortgage, such legal title is subject at all times to the borrower's right to redeem its loan, Therefore, any surplus arising following realisation of the Bank's security and repayment of the relevant loan facilities must be repaid to the borrower or otherwise applied in accordance with the relevant insolvency laws. Accordingly, the loans associated with repossessed property have not been dderecognised from the Bank's Balance Sheet as legal ttle has not transferred to the Bank. 31, Market risk ‘The Bank’s approach to managing market risk is set out on pages 11 and 12 of the Risk management review. ‘The following table shows, split by currency, the Bank’s sensitivity as at 31 December 2009 to an immediate interest rate shift of 25 basis points to all interest rates, 2009 2008 Impact of interest rate shift +25bps -25bps 425bps, -25bps ‘€000 000 €000 €000 Curreney Euro, 1,087 (1,008) 2,247 (2,145) Sterling, 1 wo 68. (68) US Dollar 26 26 37 37) Total 1,084 (4,035) 2,352 2,250) ‘The analysis demonstrates the impact to net interest income over the course of a twelve month time horizon, ‘The base case projected net interest income is calculated on the basis of the Bank’s current Balance Sheet, forward rate paths implied by current market rates, and contractual (or behavioutally adjusted) re-pricing dates; it also incorporates planning assumptions about future Balance Sheet volumes. The sensitivities show how this projected net interest income would change in response to an immediate parallel shift to all relevant interest rates — market and administered “The principal driver ofthe risk is re-pricing mismatch but the methodology also recognises that behavioural re- pricing assumptions ~ for example, prepayment rates - are themselves a function of the level of interest rates. ‘The measure, however, is simplified in that it assumes all interest rates, for all currencies and maturities, move at the same time and by the same amount. In addition, it does not incorporate the impact of management ‘actions that, inthe event of an adverse rate movement, could reduce the impact on net interest income 66Bank of Scotland (Ireland) Limited Notes to the financial statements 31. Market risk (continued) Foreign currency analysis of Balance Sheet “The table below shows the currency breakdown of the Bank Balance Sheet at 31 December 2009 and 2008: {As at 31 December 2009 EUR GBP usp Total Assets ém em €m ‘én ‘Cash and balances at Central Banke 783 2 785 Derivative assets 2 8 : 30 ‘Loans and advances to banks 96, 303 194 393 Loans and advances to customers 25,206 3,348 mM 28,665, Investment securities 1,536 u : 547 Other assets 140 42 4) ‘Total assets 2783 Bid 301 Liabilities Derivative ibiltes 95 38 1 1s Deposits by banks 21,821 2,864 129 24814 Deposits by customers 3,055 762 m 3.988 Debt securities in issue 8 ‘i : 3 (Other borrowed funds on ‘ on Other liabilities uns ® : 107 Shareholders’ equity 2,005 44 1 2,050 Total liabilities 21,776 3720 3m 31,798 Net exposure z 6 7 As at 31 December 2008 EUR cap usb Total Assets em ém €m én Cash and batances at Central Bank on 2 E on Derivative assets 29 - : 29 Loans and advances to banks 2713 413 329 3,455 ‘Loans and advances to customers 28,331 3,261 nis 31,907 investment securities 1791 “9 36 11876 Other assets 227 a aye oes Total assets ELS 3.767 476 3205 Liabilities Derivative labiltes 143 : : 143 Deposits by banks 25,836 2353 175, 28,368 Deposits by customers 41943 1368 299 6610 Debt securities in issue 37 2 : 37 (Other borrowed funds 691 61 Other liabilities 102 6) 97 Sharcholders’ equity 1 apes ‘Total liabilities as "38.205" Net exposureBank of Scotland (Ireland) Limited Notes to the financial statements 32. Funding and liquidity risk ‘The Bank's approach to managing funding and liquidity risk is set out on pages 12 and 13 of the Risk management review. ‘The table below set out the contractual cash flows attaching to the Bank’s financial liabilities. The contractual balances will not agree directly to the balances in the Bank Balance Sheet as the table incorporates all cash flows, on an undiscounted basis, related to both principal and interest payments. Certain long dated financial liabilities allow for the early termination at the option of the Bank. Where the terms of these instruments have been designed to economically compel the Bank to early settle, the earlier settlement date has been applied. For undated instruments, the earlier of 20 years or expected date of maturity has been applied. Derivative liabilities represent the contracted future cashflows for all net settled derivatives with a negative valuation at 31 December 2009 and the liability element for all gross settled derivatives. Prior year numbers have been restated to reflect the 2009 approach, ‘The Company's contractual cash flows are comparable, except for the deposits by customers, which include £8,6bn of intercompany balances that are repayable on demand and would be included in up to 1 month 2009 Uptot 103 3to12 Lyearto Overs em ‘month months months S years years Total Liabilities Deposits by banks 1,303 12,483 10,728 380 1 24,895 Deposits by customers 2341 782 450 269 9 aon Derivative liabilities = Gross settled = Net setled Debt securities in issue ‘Other borrowed funds Other liabilities Total liabilities 2008 Uptol 1103 30012 Lyearto Overs m ‘month months months Sears ‘years: Total ui Deposits by banks 2,648 12,278 12.821 144 44 28.936 Deposits by customers 2,503, 2,004 2039 168 10 ean Derivative liabilities Gross settled 2 8 B a = Net setled 1 1 9 7 Debt securities in issue 39 6 2 : . a Other borrowed funds 5 Other Hiabilities ‘Total liabiBank of Scotland (Ireland) Limited Notes to the financial statements 32. Funding and liquidity risk (continued) ‘The following table sets out the amounts and residual maturities of the Bank’s off balance sheet contingent liabilities and commitments, 2009 Within 1 103 305 Over €m year years years years Total Acceptances 2 : : : 2 Other contingent liabilities gl a9 265 ties 183 Total contingent lial 49 Lending commitments 166, ‘Total contingents and commitments 949 2008 Within 1 1103 3105 Overs €m year years years. years. Total Acceptances 3 - 3 Other contingent liabilities 280 84 29 26 419 ‘Total contingent liabilities 283 84 29 26 422 Lending commitments laa 8 1,235 ‘Total contingents and commitments 1,510 34 29 34 1,657 ‘The Bank does not manage liquidity risk on the bases of contractual maturity. Instead, the Bank manages liquidity risk based on expected cash flows. ‘The table below sets out the expected cash flows of the Bank's assets and liabilities. Additional information on the Bank’s management of liquidity and funding risk is included on pages 12 and 13 of the Risk management review, Bank 2009 2008 <2 > <12 > months months. —Total_—smonths--—months-—— Total €m ém €m €m én €m Assets Cash and balances at Central Bank 785 : 785 on 7 or Loans and advances to banks 578 15 593 3,455 > 3488 Loans and advances to customers 1,794 26.871 28,665 10,122 21,785 31,907 Investment securities 478 yo9 4,547 303, 1353311876 Derivative assets 3 21 30 6 2 29 3@8 2798 3120. 14559 8381 37.940 2009 2008 <2 >2 <2 >a months months -—Total_~—=smonths_-—=—smonths Total én €m én m €m €m Liabilities Deposits by banks 24,445 369 21275 1,089 Deposits by customers 2324 1,664 6510 100 Derivative libiltes 18 136 9 ba Debt securities in issue 8 - 37 : Other borrowed funds u 666, on lis 26,806 2,833 34424 1441Bank of Scotland (Ireland) Limited Notes to the financial statements 33. Capital resources ‘The table below sets out the Bank's capital resources. 2009 2008 ém €m Shareholders’ equity 2,050 2,243 Dated and undated loan capital om 691 Total 2,27 2.934 “The Bank’s approach to managing capital is set out on page 14 of the Risk management review. ‘The Bank's capital resources consists of both Tier 1 and Tier 2 items. Tier 1 capital includes ordinary share capital, share premium, retained earnings and other eligible reserves. Currently all Tier 1 is core, Tier 2 includes dated and undated subordinated debt. Deductions from Tier 1 and Tier 2 capital include goodwitl, intangible assets and excess expected loss. ‘The Bank remained in compliance with the minimum capital ratios set by the Financial Regulator at all times throughout the year. 34. Related party transactions |As at 31 December 2009 the Company regarded by the Directors as the ultimate parent company at 31 December 2009 was LBG, a limited liability company incorporated and domiciled in England, which was also the parent undertaking of the largest group of undertakings for which group accounts are drawn up and of which the Company is a member. LBG was the parent undertaking of the smallest such group of undertakings. From 1éth January 2009, the Bank's ultimate parent undertaking and controlling party is LBG (formerly Lloyds ‘TSB Group ple) which is incorporated in Scotland. LBG will produce consolidated financial statements for the year ended 31 December 2009. Copies of the annual report and accounts of Lloyds for the year ended 31 ‘December 2008 may be obtained from LBG's head office at 25 Gresham Street, London EC2V THIN. Included in loans and advances to banks is €599m (2008: €3,384m) in respect of placements with subsidiaries of LBG, with interest receivable on these balances of €49m (2008: €306m) included in the income statement. Included in deposits by banks is €19,586m (2008: €22,342m) in respect of deposits from LBG undertakings, with interest payable on these balances of €355m (2008: €1,151m) included in the income statement. The Banks derivatives portfolio contains €10,649m notional contracts, transactions for which LBG is the counterparty. The Bank's parent also provides guarantees for a portion of the Bank's commercial real estate portfolio, Banking transactions are entered into by the Company with its subsidiaries in the normal course of business and fre at normal commercial terms. These include loans, deposits and foreign currency transactions. At 31 December 2009, included in loans and advances to customers is €91m (2008: €71m) outstanding from subsidiaries and included in deposits by customers is €8,634m (2008: €4,316m) due to its subsidiary undertakings. Outlined below are the jointly controlled entities of the Bank 40Bank of Scotland (Ireland) Limited Notes to the financial statements 34, Related party transactions (conti dy Brooklyn Properties Limited ‘The Bank is the principal provider of finance to Brooklyn Properties Limited. During the year ended 31 December 2009, €0.2m (2008: €2.4m) was advanced by the Bank, €0.8m was repaid (2008: €0.7m) and €0.6m 2008: €1.3m) of interest was charged. At31 December 2009, a foan balance of €23.4m (2008 €23.5m) was, due to the Bank. Hillview (Watford) Limited ‘The Bank is the principal provider of finance to Hillview (Watford) Limited. During the year ended 31 December 2009 €0.1m (2008: €3.4m) was advanced by the Bank, €2m (2008: €3.4m) was repaid to the Bank ‘and €0.20m (2008: €0.35m) of interest was charged. At 31 December 2009, a loan balance of €3.4m (2008 £€4.9m) was due to the Bank ‘Venture Capital Funds ‘The Bank acts as a General Partner to the ICC Venture Capital Fund, the ICC Software Fund No. 2, the ICC Private Equity Fund and the ICC Regional Venture Capital Fund, ‘The General Partner is entitled, asa first charge on the net income and capital gains of the limited partnership, to an amount equal to the aggregate of a percentage of the total commitments of all the partners. At 31 ‘December 2009, total entitlements due from the funds to the Bank amounted to €0.8m (2008: €1.6m). |At 31 December 2009, there were loans and advances of €19m (2008: €22m) to the funds. At 31 December 009, included in other assets were current accounts held by the funds with the Bank amounting to €0.8m (2008: €1.1m), 35, Transactions with directors Directors’ remuneration 2009 2008 €000 €000 Directors’ fees 321 278 Emoluments for other services 1,291 1,860 Pension contributions 164 242 Compensation for loss of office 2,169 : Total emoluments 3.945 2376Bank of Scotland (Ireland) Limited Notes to the financial statements 35. Transactions with directors (continued) Detailed below is the amount of outstanding loans as at 31 December 2009 to individuals who at any time during the year were Directors Directors’ loans Atl Repay- Interest AGS Maximum January ments eharged December ‘exposure a 2009 2009 during the year 936 a) 28 891 938 =Connected party _506 19) 16 503 506 M. Pratt Total 1442 (92) “4 13394 1444 J. Higgins 2,016 89) 33 1,680 2,019 M. Duffy 3,094 ay 81 3,064 3,106 R. McDonnell 141 (8) 5 138 141 Total 6,693 __(600) 183 6.276 6.710, ‘There are no provisions held against Director’s loans and connected parties (2008: Nil). Loans include mortgages, credit cards and term loans of which €5,887k is secured and €389k is unsecured. ‘The total aggregate loans outstanding accounted for 0.3% of the Bank’s net assets as at 31 December 2009 (2008: 0.3%), 36. ‘Transactions with key management personnel “The following disclosures are made in accordance with the provisions of IAS 24 - Related Party Disclosures, in respect of the compensation of key management personnel. Under IAS 24,°Key Management Personnel” are defined as comprising directors (executive and non-executive) together withthe Executive Committee. “The figures shown below include the figures separately reported above in respect of directors’ remuneration, ‘Remuneration and other compensati f key management personnel 2009 2008 000 000 Director’s fees 321 274 Emoluments for other services 3,466 3,041 Pension contributions 389 478 Compensation for loss of office 2,756 250_ 6,932 043 Details of remuneration reflect amounts accrued to the Income Statement during the year.Bank of Scotland (Ireland) Limited Notes to the financial statements 36. Transactions with key management personnel (continued) Product transactions Key management personnel and other colleagues, as well as receiving salary, incentives, shares, pensions and other benefits are entitled to enter into transactions with the Bank. These transactions are generally in the form of banking, savings, mortgage, loan, insurance, assurance and investment products. Any product offerings that fre received on beneficial terms compared to the terms received by customers and which give rise to taxable benefits in kind are declared to the appropriate tax authorities and taxed accordingly. Key management personnel and members of their close families have undertaken transactions with the Company and its subsidiaries, and joint controlled entities in the normal course of business, details of which are given below: ‘Key management personnel: Mortgages and term loans Savings, deposit and current accounts Number of €000 Number of €000 At 1 January 2008 8 7,450 536 Upon resignation 1 (1,549) (41s) Upon appointiment 1 B 29) Amounts advanced/deposited 8 1853 1,806 Interest charged 9 314 7 ‘Amounts repaid during the year 8 675 (658) At31 December 2008 9 7471 1,247 Upon resignation 2 (1,207) a6) Upon appointment 2 3,043 an ‘Amounts advanced/deposited 4 37 325 Interest credited 7 145, 18 Reclassifications 3 (134) (42) ‘Amounts repaid during the year 8 (600) _ ay At31 December 2009 3 8,755 1961 Loans include mortgages and term loans of which €8,304k is secured and €451k is Savings include savings and deposit accounts. 37. Post-balance sheet events (On 9 February 2010, the Bank announced its intention to close both the Halifax retail business in the Republic of Ireland and the Bank of Scotland (Ireland) intermediary business. The resulting closure of 44 Halifax retail branches and the majority of the associated job losses are planned to take place by the end of July 2010. The continuing business will focus on its established strengths and long standing heritage in corporate and commercial banking. ‘The Bank’s decision followed the completion of a strategic review, which concluded in early February 2010. At the balance sheet date, a number of strategic options were being pursued. However, subsequent events resulted in only one outcome remaining viable, The retail and intermediary businesses accounted for €396m of the Bank’s overall loss for the year ended 31 December 2009. It is not possible to estimate the cost of exiting these businesses given the proximity to the announcement.Bank of Scotland (Ireland) Limited ‘Notes to the financial statements 38. Guarantee of subsi ary undertakings In accordance with Section 17 (i) (b) of the Companies (Amendment) Act 1986, the Bank has irrevocably guaranteed the liabilities of all its wholly owned subsidiary companies in respect of the financial period commencing, | January 2009, with the following exceptions, BOS (Ireland) Funding ple, ICC ESOP Trustee Limited and ICC Corporate Finance Limited 39. Approval of financial statements ‘The Board of Directors approved the financial statements on 26 February 2010.