Anglo Interim Report 2011

Interim Report
Six months ended 30 June 2011
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At Anglo Irish Bank, we take a responsible approach to environmental issues and have worked with our print partner to minimise the environmental impact of our Interim Report publication. The paper selected for this report comes from certied well managed forests, accredited by the PEFC to a standard known as Chain of Custody. These certied forests are managed to ensure long term timber supplies while protecting the environment and the lives of the forest dependent people. The Interim Report is a CarbonNeutral publication. This was achieved by selecting a print partner who is already a CarbonNeutral company and by offsetting the unavoidable emissions associated with the production of this Interim Report. Anglo Irish Bank is pleased to be able to add both the CarbonNeutral and the PEFC logos as evidence of achieving these standards.
ANGLO IRISH BANK Interim Report 2011
Contents
Forward looking statements & Contacts Economic backdrop Chairmans statement Group Chief Executives review Business review Principal risks and uncertainties Statement of Directors responsibilities Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the interim financial statements Independent review report 2 3 4 6 8 16 21 22 23 24 25 28 30 80
Forward looking statements

This report contains certain forward looking statements with respect to the financial condition, results of operations and businesses of Anglo Irish Bank Corporation Limited. These statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements. The statements are based on current expected market and economic conditions, the existing regulatory environment and interpretations of IFRS applicable to past, current and future periods. Nothing in this report should be construed as a profit forecast.
Contacts
For further information, please contact: Ireland: Billy Murphy / Martha Kavanagh Drury Communications Tel: +353 1 260 5000 Jeremy Carey / John West Tavistock Communications Tel: +44 207 920 3150 Billy Murphy / Martha Kavanagh Drury Communications Tel: +353 1 260 5000
United Kingdom:
United States:
This document constitutes the interim management report required by Regulation 6 of the Transparency (Directive 2004/109/EC) Regulations 2007. It can also be found on the Group's website: www.angloirishbank.com.
Economic backdrop
Property markets Property prices in developed markets are significantly below their 2006/07 peaks (indices rebased to 100). Commercial property prices in Ireland continued to fall while the US and UK show some signs of stability above the lows of mid 2009. Sovereign yields The spread of Irish Government bonds over their German equivalents continued to rise in 2011 as worries over the Irish economy intensified. Investors continue to seek safety in German Bunds.
Property price index 170 150 130 110 90 70 50 Dec 04
Yield 9.20 8.40 7.60 6.80 6.00 5.20 4.40 3.60 2.80 2.00 Jul 10
Dec 05
Dec 06
Dec 07
Dec 08
Dec 09
Dec 10
Sep 10
Nov 10
Jan 11
Mar 11
May 11
Ireland IPD All Property US IPD All Property
UK IPD All Property
Ireland Vs Germany 10 yr
Employment in construction The numbers employed in construction continued to fall in 2011 as the industry continues to contract.
Stock markets After a positive start to the second half of 2010 the ISEQ underperformed versus the FTSE Euro 300 during 2011. The ISEQ has posted a marginal gain for the previous 12 months (indices rebased to 1000).
Index 1,300 1,200
Construction employment 280 250 220 190 160 130 100 Dec 04
1,100 1,000
Dec 05
Dec 06
Dec 07
Dec 08
Dec 09
Dec 10
900 Jul 10
Sep 10
Nov 10
ISEQ
Jan 11
Mar 11
May 11
Employment in Construction '000
FTSE E300
Trade surplus The Irish seasonally adjusted monthly trade surplus has been volatile throughout 2011. A sharp increase in May 2011, reversing a fall in April 2011, was due to a significant fall in imports with exports remaining static.
Currency markets The euro has strengthened significantly against the dollar over the last 12 months, gaining 18.5%. Over the same period the euro has gained 10% against sterling.
Irish trade surplus

4,200 3,600 3,000 2,400 1,800 1,200 Dec 04
Currency 1.5 1.4 1.3 1.2 1.1 1 0.9
Dec 05
Dec 06
Dec 07
Dec 08
Dec 09
Dec 10
0.8 Jul 10
Sep 10
Nov 10
EUR/USD
Jan 11
Mar 11
May 11
Irish trade surplus m
EUR/GBP
Chairmans statement
Overview
The first half of 2011 has been an eventful period for the Bank. Following intensive interaction by the Banks management with the Authorities during 2010 in identifying and analysing the best course of action for the Bank, a number of significant actions were taken as part of the ongoing restructuring process. Significant progress was made in deleveraging the Bank and in controlling and containing risk. These achievements reflect the commitment of the Board and senior management of the Bank to continue to operate to the mandate given by the Banks Shareholder which is to run the Bank in the public interest and in a manner that minimises the cost to the taxpayer. Despite recording a year to date operating profit before disposals and provisions of 332m the Bank reports a loss before taxation for the six months to 30 June 2011 of 101m. Total assets at 30 June 2011 amounted to 54.1bn, representing a decline in the period of 16.7bn or 24% (on a constant currency basis). This reduction constitutes significant progress in deleveraging and in containing risk. Action by the Bank ensured that, despite a difficult operating environment, it did not require any additional capital injections during the period. Total capital support provided by the Shareholder remains at 29.3bn, resulting in a Total Capital ratio at 30 June 2011 of 13.7% and a Core Tier 1 ratio of 12.1%. Further details in respect of the Banks results for the period are provided in the Group Chief Executives review and in the Business review.
Legacy matters, disclosures and exceptional expenses

The Bank continues to co-operate fully with ongoing investigations by the various Authorities. It will continue to disclose its activities and financial position in a fully transparent manner and as required by legislation and market regulation and in the public interest. While staff costs have fallen by 16% in the 6 months to 30 June 2011 compared with the period to 30 June 2010, other administrative costs have increased by 50% as a result of significantly higher professional fees related to loan book asset quality, litigation and other ongoing reviews. The Bank is engaged in a number of ongoing legal proceedings, each of which is being vigorously defended, albeit at the risk of considerable cost to the Bank and therefore to the Irish taxpayer. Exceptional costs of 29m were incurred in the period and primarily relate to professional fees associated with the Banks restructuring, the NAMA process and the ongoing investigations into legacy matters. A proportion of these costs arise from the Authorities requirement for external validation of measures proposed by the Bank.
Future of the combined entity

We will now continue with the task of working out the Banks operations over time in accordance with directions given to the Bank consistent with the Restructuring Plan, notably with: The sale of the Banks US loan book; this process is already underway and is expected to complete in the coming months; The orderly management and wind-down of the Banks UK commercial loan book over the next five years with the sale of any residual part of that loan book thereafter; The orderly management and wind down of the Banks Irish commercial loan book over a period of up to ten years (or earlier, depending on prevailing market conditions); An orderly management of the Banks Irish residential loan book with a view to a sale of the remaining loans within five years; The disposal of the Banks Wealth Management division (the evaluation of various alternative proposals is ongoing in relation to this project); and Full resolution of the Bank by 2020.
Restructuring
Two years after nationalisation, the European Commissions approval of a restructuring plan for Anglo Irish Bank and Irish Nationwide Building Society (the Restructuring Plan), paved the way for a combined entity which will focus on the orderly work out of its loan book over time. The integration of the two entities will require us to bring about further changes in order to put in place an organisation capable of delivering on our business and stakeholder work-out objectives. As part of the reorganisation and restructuring of the combined entity, the Bank will change its name to Irish Bank Resolution Corporation Limited (IBRC) in the coming months. This development will underline the Banks focus on the challenges ahead. The new organisational structure will be bedded in as rapidly as possible over the coming months. A reduction in headcount numbers will be an inevitable part of this process. As Chair of the Board and a public interest appointee, I thank and commend the staff and management of the Bank for their diligence and commitment to the public interest in extremely difficult and demanding circumstances. They have responded in an exemplary fashion to the exacting demands of the Board.
The Board will work closely with the management and staff of the Bank to pursue these various initiatives throughout the future phases of the Banks resolution.
Chairmans statement continued
Conclusion
Whilst the Bank has made considerable progress in a difficult economic environment over the last three years, the unprecedented market turmoil, market liquidity and currency issues that currently face eurozone countries present a challenging background to the Bank as it pursues the next phase of its restructuring. On behalf of the Board, I would like to thank the management and staff of the Bank for their continued dedication and focus on continuing to implement significant change in the organisation over the last six months. In addition, I would like to thank the Minister for Finance and the staff of the Department of Finance, the Central Bank of Ireland and the National Treasury Management Agency for working collaboratively with the Bank during this period.
Alan Dukes Chairman 25 August 2011
Group Chief Executives review

Throughout the first six months of 2011, my continued objective, and that of the new management team, has been to run the Bank in the public interest and in a manner that ultimately minimises the cost to the taxpayer. During this period the Bank has continued to make considerable progress on restructuring developments. This progress has followed our focus in 2010 on stabilising and de-risking the Bank together with developing an appropriate restructuring plan. Key developments during this financial period include: European Commission (EC) approval of the Banks restructuring plan On 31 January 2011, a joint restructuring and work-out plan for the Bank and Irish Nationwide Building Society (INBS) was submitted to the EC. This restructuring plan provided for the amalgamation of the Bank and INBS following the transfer of the majority of their deposit books and their senior NAMA bonds to other financial institutions. Those transfers took place on 24 February 2011 and, on 29 June 2011, the EC, under EU State Aid rules, approved the restructuring plan and cleared the way for the planned amalgamation to proceed. The restructuring plan envisages the work-out of the combined entity over a period of up to 10 years and the Bank is grateful for the full support and commitment of the Government to this effort. Transfer of the Banks deposits to Allied Irish Banks, p.l.c. and AIB Group (UK) p.l.c. Following a Direction Order made by the High Court on 8 February 2011 under the Credit Institutions (Stabilisation) Act 2010 (CISA) and pursuant to a Transfer Order made by the High Court under CISA on 24 February 2011, the Bank transferred the vast majority of its Irish and UK customer deposits to Allied Irish Banks, p.l.c. (AIB) and AIB Group (UK) p.l.c. (AIB UK), together with its senior NAMA bonds and its Isle of Man subsidiary. This reduced the Banks balance sheet by approximately 11bn. Over 200 staff transferred to AIB and AIB UK as part of this process and I would like to thank them for their commitment and hard work through what was, at times, an extremely uncertain period. Disposal of the Banks Wealth Management business Also contained in the above mentioned Direction Order was a requirement for the Bank to formulate a detailed plan for the disposal of its Wealth Management business; the Bank complied with this requirement and submitted the detailed plan to the National Treasury Management Agency (NTMA). In compliance with requirements issued by the Minister for Finance under Section 50 of CISA on 7 April 2011 (the Ministerial Requirements) the Bank has since commenced a process of examining the potential sale of the business and a number of non-binding indicative proposals from potential purchasers have been received. A number of these prospective purchasers have been invited to further progress their assessment of the business and a subsequent phase of due diligence has commenced. No final decision has however been taken yet by the Board to dispose of the business and evaluation of the various alternatives is ongoing. Closure of the Banks European branches Pursuant to the Direction Order and the Ministerial Requirements, the Banks branches in Austria and Jersey were closed in June 2011. Furthermore, the Banks branch in Germany is in the process of being formally closed. Accelerated sale of the Banks US loan portfolio In line with directions consistent with the Banks restructuring plan, and a progressive and material improvement on the US market for real estate investment, a sales process for the Banks US loan book was launched on 22 June 2011. With analysis and preparation completed, advisors have been appointed and the sales process is now underway. This is expected to complete in the coming months. All of these developments represent significant steps forward in the restructuring of the organisation and have been achieved through the considerable focus and effort of the Banks management and staff operating with the full support of the Board.
Financial Performance
The Banks results continue to reflect the challenging economic environment. Economic backdrop The overall specific impairment charge on the Banks loan portfolios of 0.9bn has reduced significantly in the period to 30 June 2011 versus the same period in 2010 due to the reduction in gross loan balances primarily as a result of those assets transferred to NAMA in 2010. The asset quality of the Banks loan books across all sectors and locations continues to be adversely affected by the continuing difficult economic and market conditions. Ireland continues to be the worst affected market, accounting for 82% of the overall specific impairment charge reflecting the difficult economic environment, further declines in property values, lack of liquidity and high levels of unemployment. In Ireland, the deterioration showed no signs of easing in the period with domestic demand remaining weak, investment and Government expenditure declining and household expenditure static. These factors are further compounded by the increase in market interest rates during the period. Operating conditions in the investment assets sector, particularly the office and retail sectors, continue to remain challenging, brought about by a significant reduction in consumer spending, high levels of unemployment in Ireland and investor uncertainty regarding the Governments plans to end upward only rent reviews in existing leases. The development property market in Ireland remained severely dislocated in the period with land values declining back to agricultural values in many cases. There also remains a significant overhang in both the commercial and residential markets as lenders seek to deleverage and de-risk their loan portfolios. Notwithstanding these difficulties, the Bank did not require any additional capital injections during the period. As at 30 June 2011 the Group reported total capital support provided by the Shareholder at 29.3bn, resulting in a Core Tier 1 ratio of 12.1% and a Total Capital ratio of 13.7%. The level of surplus regulatory capital above the minimum required 8% Total Capital ratio at 30 June 2011 is 1.8bn. Further losses and/or increased capital requirements will impact on this level of surplus capital.
Group Chief Executives review continued
Financial results Despite recording a year to date operating profit before disposals and provisions of 332m the Bank reports a loss before taxation for the six months of 101m. The operating profit of 332m and a favourable adjustment of 601m to the cumulative loss on transfer of assets to NAMA are more than offset by impairment charges of 778m and the loss of 214m on transfer of the majority of the Banks Irish and UK deposits, the Banks senior NAMA bonds and its Isle of Man subsidiary to AIB and AIB UK. Interest income on the Governments promissory note is a key contributor to operating profit. Total assets at 30 June 2011 amounted to 54.1bn representing a decline in the period of 16.7bn or 24% (on a constant currency basis). The principal items driving this reduction were the transfer of customer deposits and NAMA senior bonds to AIB and AIB UK, the ongoing deleveraging of the loan portfolio and the receipt from the Shareholder of the first payment due on the promissory note. The promissory note represented 44% of the Banks total assets as at 30 June 2011. The transfer of the majority of the Banks Irish and UK deposits to AIB and AIB UK in February 2011 increased the Banks reliance on Government and monetary authority support mechanisms for funding. Funding from central banks amounted to 40.8bn at 30 June 2011 (31 December 2010: 45.0bn), with 38.4bn borrowed under special funding facilities (31 December 2010: 28.1bn). The Banks credit ratings were downgraded to sub-investment grade in late 2010 by Standard & Poors and Moodys and by Fitch in February 2011. Asset management and recoveries The Banks primary focus remains the orderly work out of the loan book while minimising losses to the taxpayer and maximising returns on its portfolio. As the Bank continues to deleverage its lending portfolio, total gross customer loan balances have declined in the period by 2.7bn or 8% on a constant currency basis and at 30 June 2011 were 32.8bn. The reduction in the loan book has been primarily driven by repayments in the US (1.1bn) and UK (1.0bn) where there have been signs of improvement and stabilisation in some sections of the market. This is in addition to the improvement in the availability of liquidity and refinancing options in those markets. Deleveraging of the Irish portfolio remains more challenging due to the continuing stressed economic environment and lack of liquidity, however there has been some success primarily in the business banking and personal sectors with overall loan balance reductions of 0.6bn. The asset quality of the Banks loan book across all sectors and locations continues to be adversely affected by the weak economic environment and challenging market conditions. The continuing deterioration of the Irish economy has seen an increase in the proportion of the overall loan book that is either impaired, past due but not impaired or lower quality and is therefore deemed at risk by management. The Bank continues to pro-actively work with distressed customers, with the aim of maximising recovery for the Bank and, where appropriate, restructuring such loans so as to strengthen and improve asset quality.
Costs Staff costs have fallen by 16% in the 6 months to 30 June 2011 compared with the period to 30 June 2010. Staff costs have declined due to a reduction in the average number of employees which was 17% lower in the six months to 30 June 2011 compared with the same period last year. The reduction is primarily due to 210 staff being transferred to AIB and AIB UK as part of the Transfer Order of 24 February 2011. The Group headcount at 30 June 2011 is 1,075, a reduction of 221 since 31 December 2010, and includes 130 people working in the Banks NAMA unit and 70 associated support staff. Other administrative costs have increased by 50% as a result of significantly higher professional fees related to loan book asset quality and other ongoing reviews. Other cost lines continue to remain tightly controlled. Exceptional costs of 29m were incurred in the period and primarily relate to professional fees associated with the Banks restructuring, the NAMA process and the ongoing investigations into legacy matters.
Future Strategy
The transfer of the INBS business into the Bank is now complete and full integration into a single organisation is underway. This transfer and integration is another important step towards the reshaping of the Irish banking landscape for future economic recovery. As has already been announced, the Bank intends to change its name to Irish Bank Resolution Corporation Limited or IBRC. It is anticipated that the renaming process will complete in the coming months. I believe that the work completed by those in the Bank, in conjunction with the Authorities, over the last 18 months has paved the way for an orderly and effective work out which is in the best interests of the Irish taxpayer. This reflects a major shift in focus for the organisation from being a high octane lender to an effective asset manager of portfolio sales and redemptions. This focus will remain the Banks priority as we face into the challenges of the next phases of restructuring. I join the Chairman in expressing a sincere thank you to our management team, our staff and other stakeholders for all the support and consistent effort in difficult and uncertain times.
A.M.R. (Mike) Aynsley Group Chief Executive 25 August 2011
Business review
This business review covers the six months to 30 June 2011 and includes commentary on key areas of financial and operating performance of the Group during that period. The Bank reports a loss before taxation for the six months of 101m. This loss arises primarily due to net impairment charges of 778m, a loss of 214m on the transfer of the majority of the Banks Irish and UK deposit books, certain NAMA bonds and the Banks shares in its deposit-taking Isle of Man subsidiary to Allied Irish Banks, p.l.c. (AIB) and its UK subsidiary AIB Group (UK) p.l.c. (AIB UK) on 24 February 2011 pursuant to a transfer order made by the Irish High Court under Section 34 of the Credit Institutions (Stabilisation) Act 2010 (CISA) (the AIB Transfer Order) and a loss of 40m on other disposals offset to an extent by an operating profit of 332m and a favourable adjustment of 601m to the cumulative loss on transfer to the National Asset Management Agency (NAMA). Interest income on the promissory note is a key contributor to operating profit in the period. For the comparable period to 30 June 2010 the Bank reported a loss before taxation of 8.2bn reflecting total impairment charges of 4.9bn and a loss on disposal of assets to NAMA of 3.5bn. On 29 June 2011 the European Commission (EC) approved, under EU state aid rules, the joint restructuring and work-out plan (the Restructuring Plan) for the Bank and Irish Nationwide Building Society (INBS) which had been submitted by the Irish Government to the EC on 31 January 2011. Pursuant to the Restructuring Plan, the Bank and INBS were to be combined and then resolved over a period of up to ten years. While this business review covers the period to 30 June 2011 only, the following post period end events should be noted: (a) on 1 July 2011, all of the assets and liabilities (with the exception of certain limited excluded liabilities) of INBS transferred to the Bank by way of a further transfer order made, by the Irish High Court, under Section 34 of CISA (the INBS Transfer Order) and (b) on that date the Bank announced its intention to change its name to Irish Bank Resolution Corporation Limited (IBRC) over the coming months. The strategic objective of the Bank will be to work out its assets in an orderly process over a period of up to ten years, securing the best outcome for the taxpayer. The results for the six months ended 30 June 2011 do not include any amounts relating to INBS. Further information in relation to the INBS Transfer Order is contained in note 41, Events after the reporting period. The transfer of the majority of the Banks customer deposits pursuant to the AIB Transfer Order increased the Banks reliance on central bank and monetary authority support mechanisms for funding. This represented 86% of total funding (40.8bn) at 30 June 2011 (31 December 2010: 70%, 45.0bn), with 38.4bn borrowed under special funding facilities (31 December 2010: 28.1bn). Total assets at 30 June 2011 amounted to 54.1bn, a decline in the period of 16.7bn or 24% on a constant currency basis. The principal items driving this reduction were the transfer of NAMA senior bonds to AIB pursuant to the AIB Transfer Order, the ongoing deleveraging of the loan portfolio and receipt from the Minister for Finance, the Banks sole shareholder, of the first payment due on the promissory note. The Government promissory note represents 44% of the Banks total assets as at 30 June 2011. Gross customer lending at 30 June 2011 totals 32.8bn1. Impaired loans amount to 16.9bn, with cumulative impairment provisions of 9.9bn representing 30% of total loan balances. Total capital support provided by the Minister for Finance, the Banks sole shareholder, remains at 29.3bn. The Total Capital ratio at 30 June 2011 is 13.7% with a Core Tier 1 ratio of 12.1%.
Customer lending and asset quality

The Banks primary focus remains the orderly work out of the loan book while minimising losses to the taxpayer. Total gross customer loan balances declined in the period by 2.7bn or 8% on a constant currency basis and amounted to 32.8bn1 at 30 June 2011. Cumulative impairment provisions at 30 June 2011 amount to 9.9bn with a specific lending impairment charge for the six months to June 2011 of 0.9bn offset by a release of 0.2bn of the collective impairment provision. Impaired loans at 30 June 2011 total 16.9bn representing 52% of overall loan balances.
Total lending Analysis of customer lending1 Held for sale 30 June 2011 bn Ireland UK US Total Provisions for impairment Customer lending net of impairment Provisions as a % of loan balances 0.9 0.3 6.7 7.9 (1.2) 6.7 15% 31 December 2010 bn 0.9 0.6 0.7 2.2 (0.6) 1.6 27% Loans and advances to customers 30 June 2011 bn 15.4 9.5 24.9 (8.7) 16.2 35% 31 December 2010 bn 16.2 10.9 7.6 34.7 (9.5) 25.2 27%
Business review continued
Gross customer lending balances at 30 June 2011 total 32.8bn1, of which 24.9bn or 76% relate to loans and advances to customers with 7.9bn or 24% classified as held for sale. Held for sale loan balances comprise the entire US loan portfolio of 6.7bn which is currently being actively marketed and 1.2bn of loans which at 30 June 2011 were expected to transfer to NAMA. Since the reporting period end, NAMA have confirmed that they will not now be acquiring 0.9bn of these loans. The Banks Ireland division accounts for 50% of total lending with the UK and US divisions accounting for 30% and 20% respectively. Lending balances have decreased on a constant currency basis by 2.7bn (8%) in the period as the Bank continues to focus on deleveraging its lending portfolio. The reduction in the loan book has been primarily driven by disposals and repayments in
the US (1.1bn) and UK (1.0bn) where there have been signs of improvement and stabilisation in some sections of the market, in addition to an improvement in the availability of liquidity and refinancing options in those markets. Deleveraging of the Irish portfolio remains more challenging due to the continuing stressed economic environment and lack of liquidity, however there has been some progress primarily in the business banking and personal sectors with overall loan balance reductions of 0.6bn. The Bank transferred 33.9bn of assets (gross of impairment provisions) to NAMA in 2010 and as a result interest income on customer lending (including held for sale assets) for the six months to June 2011 reduced to 0.4bn, a decline of 51% compared to the six months to 30 June 2010 (0.9bn).
Lending asset quality Grading analysis1 Loans and advances to customers bn Good quality Satisfactory quality Lower quality but not past due or impaired Total neither past due nor impaired Past due but not impaired Impaired loans 3.9 0.1 3.4 7.4 3.9 13.6 24.9 Provisions for impairment Total (8.7) 16.2 30 June 2011 Held for sale bn 2.2 0.1 1.4 3.7 0.9 3.3 7.9 (1.2) 6.7 31 December 2010
Total bn 6.1 0.2 4.8 11.1 4.8 16.9 32.8 (9.9) 22.9
% 19% 1% 14% 34% 14% 52% 100%
Total bn 7.6 1.0 4.8 13.4 5.9 17.6 36.9 (10.1) 26.8
% 20% 3% 13% 36% 16% 48% 100%
The asset quality of the Banks loan book across all sectors and locations continues to be adversely affected by the continuing stressed economic and market conditions. There has been improvement in some sections of the UK and US markets, however, the continuing weakness of the Irish economy has seen an increase in the proportion of the overall loan book that is either impaired, past due but not impaired or lower quality and is therefore deemed at risk by management. At 30 June 2011, 80% of loans are classified as at risk (31 December 2010: 77%). Impaired loans at 30 June 2011 total 16.9bn (31 December 2010: 17.6bn), and represent 52% of the total loan book versus 48% at 31 December 2010. Ireland continues to be the worst performing region with 64% of the portfolio impaired and specific provisions totalling 41% of gross loans. In the UK and US 35% and 46% respectively of the portfolios are impaired. The amount of loans classified as past due but not impaired declined to 4.8bn at 30 June 2011 from 5.9bn at 31 December 2010. The decrease primarily reflects the downward migration of loan balances to impaired status. Ireland accounts for 3.0bn (62%) of the total past due but not impaired amount, the UK 1.4bn (29%) and the US 0.4bn (9%).
The level of loans past due and outstanding for more than 90 days, which represents the highest risk element of past due, has decreased from 3.2bn at 31 December 2010 to 2.9bn but as a proportion of the overall past due figure has increased to 60% at 30 June 2011 (31 December 2010: 55%). A full aged analysis is included within note 37 to the interim financial statements. Lower quality but not past due or impaired loans at 30 June 2011 totalled 4.8bn or 14% of gross lending assets. Although currently not past due or impaired, these represent loans which management deem to have a higher risk of deterioration. Lending assets deemed to be good quality by management total 6.1bn at 30 June 2011, representing 19% of total gross lending assets. The asset quality of the loan book is a reflection of the distressed economic and market conditions in which many of the Banks borrowers are currently operating. The Bank continues to pro-actively work with distressed borrowers with the aim of maximising recovery for the Bank and, where appropriate, restructures such loans so as to strengthen and improve asset quality.
Divisional lending balances by sector1 30 June 2011 Commercial bn Held for sale Ireland UK US 0.7 0.3 5.4 6.4 Loans and advances to customers Ireland UK 8.9 8.8 17.7 Total 24.1 0.7 0.6 1.3 2.6 3.2 0.1 3.3 3.3 2.6 2.6 2.8 15.4 9.5 24.9 32.8 0.1 1.2 1.3 0.1 0.1 0.2 0.9 0.3 6.7 7.9 Residential bn Business Banking bn Other bn Total bn
The entire US loan book was classified as held for sale at 30 June 2011 as a result of the commencement of a sale process pursuant to directions received by the Bank, and requirements issued in respect of the Bank, in each case under CISA and consistent with the Banks Restructuring Plan. The Banks non-held for sale loan portfolio totals 24.9bn. Commercial lending represents 71% of this and consists of investment and development property lending across all sectors. 14bn (79%) of commercial lending relates to the retail, office and leisure sectors. The business banking sector accounts for 3.3bn, or 13%, of the loan portfolio. The Bank is looking primarily to business earnings to service these debt obligations. Residential lending of 1.3bn comprises 0.5bn residential development and 0.8bn of residential investment. Ireland represents 62% of loans and advances to customers, excluding loans held for sale, with UK lending comprising the balance.
Loans and advances to customers by regulatory group size1 The top 20 customer groups, excluding loans classified as held for sale as at 30 June 2011, represent 8.6bn or 35% (31 December 2010: 9.1bn or 26%) of the Group's total loans and advances to customers before provisions for impairment. Total specific impairment provisions on these customer groups amount to 2.8bn. Of the top 20 customer groups, one group accounts for 11% of gross loans and advances to customers. A regulatory customer group typically consists of a number of connected entities and the balances represent multiple individual loans secured by diverse portfolios of assets and multiple contracted cash flows. At 30 June 2011 undrawn committed facilities totalled 0.5bn (31 December 2010: 0.6bn). Advances during the period were restricted to previously committed facilities or approved to protect asset quality and aimed at reducing the overall risk to the Bank. In line with commitments given by the Bank in connection with the approved Restructuring Plan, the Bank is not engaged in any new lending to new customers.
10
Lending impairment charge for the period Income statement - lending impairment 6 months ended 30 June 2011 m 903 36 939 (209) 730 6 months ended 30 June 2010 m 2,492 2,280 4,772 27 4,799 Year ended 31 December 2010 m 4,956 2,683 7,639 21 7,660
Specific charge - loans and advances to customers Specific charge - held for sale Total specific lending impairment Collective provision movement Total lending impairment
The specific lending impairment charge of 939m for the six months to 30 June 2011 represents 5.4% of average loan balances. The overall charge has reduced significantly compared to the same period in 2010 due to the reduction in gross loan balances primarily as a result of the transfer of assets to NAMA in 2010. Of the total charge 903m relates to loans and advances to customers with 36m relating to assets classified as held for sale. The entire US loan book was reclassified as held for sale at 30 June 2011. The loans and advances charge includes impairment related to US loans prior to their designation as held for sale. Impairment is calculated in accordance with IFRS and reflects losses incurred in the period based on conditions existing at 30 June 2011. Losses expected as a result of future events, no matter how likely, are not recognised under IFRS. In line with the Banks credit risk management process, the specific charge was determined following a detailed assessment by Group Risk Management.
There has been a release of 209m in the collective impairment provision in the period. The balance sheet collective impairment provision at 30 June 2011 is 995m, or 6.3% of the total performing loan book. This release is principally attributable to the decrease in the performing loan book, on which the Incurred But Not Reported provision is assessed, which continued to fall as a result of the deleveraging of the portfolio and a migration of loans to nonperforming. At 30 June 2011 the performing portfolio totalled 15.9bn compared to 19.3bn at end December 2010 and 29.8bn at 30 June 2010. The collective impairment provision reflects an allowance for loan losses existing in the performing loan book where there is currently no specific evidence of impairment on individual loans. The provision has been calculated based on historical loss experience supplemented by observable market evidence and managements judgement relating to market conditions at 30 June 2011.
Income statement - specific lending impairment
6 months ended 30 June 2011 m 773 143 23 939
6 months ended 30 June 2010 m 3,755 459 558 4,772
Year ended 31 December 2010 m 5,813 737 1,089 7,639
Ireland UK US Total
Ireland continues to be the worst affected market accounting for 82% of the overall specific impairment charge reflecting the continuing difficult economic environment, lack of liquidity and weak consumer sentiment. On a sector basis, 0.6bn (68%) of the specific charge relates to investment property assets. This has primarily been driven by investment property valuations in Ireland which have yet to stabilise and have the potential to fall further. Development loan assets contributed 0.1bn (6%) of the total specific charge with Ireland accounting for 76% of the charge on development loan assets. The development property market in Ireland continues to remain severely dislocated with land values declining back to agricultural values in many cases. A significant overhang continues to exist in both the commercial and residential markets.
The remaining specific charge of 0.2bn (26%) is attributable to business banking (0.1bn) and personal lending (0.1bn), of which 99% relates to Ireland. The business banking portfolio continued to experience extremely tough trading conditions during the period with a significant number of liquidations and receiverships in Ireland. The personal lending charge primarily relates to smaller personal loans. As advised in the 2010 Annual Report and Accounts, the Bank is undertaking an internal review of historical interest rate settings as applied to certain customer loan accounts for the period prior to January 2005, to determine whether interest rates applied were consistent with terms of the associated customer loan documentation. An additional provision of 22m was charged in the period to cover the amount of any liability to customers who may have been adversely affected, taking the total charge to 67m.
11
NAMA In the current period the Bank has recognised a net reduction of 601m in the overall reported loss on disposal of assets to NAMA. This primarily results from positive valuation adjustments, both settled and expected, relating to the completion of due diligence on a portion of the loans transferred to NAMA during November and December 2010. In late 2010 the Bank transferred 17.5bn of loans to NAMA without full due diligence having been completed. The loans were transferred at an average discount of 64%. During the period to 30 June 2011 the Bank received nominal consideration of 284m, 95% in the form of NAMA senior floating rate notes and 5% in the form of NAMA subordinated notes. This represents the net amount owing to the Bank following the completion of due diligence on 5.5bn of loans, the settlement of certain valuation adjustments and repayment to NAMA of consideration previously received in respect of a small number of ineligible loan assets that were transferred back to the Bank. The NAMA bonds received were recognised at an initial fair value of 96% and 30% respectively. The final overall loss on disposal of assets to NAMA will only be determined when full due diligence has been completed by NAMA on all assets transferred. However, on the basis of work completed to date in connection with loan collateral valuations, and based on preliminary engagement with NAMA, the Bank has also recognised an asset of 262m at 30 June 2011. This asset, which involves estimations and assumptions, represents the anticipated value of further net positive valuation adjustments yet to be received. NAMA has complete discretion as to which assets will be acquired. The remaining assets which the Bank expects to transfer to NAMA have been categorised in the consolidated statement of financial position as held for sale assets. At 30 June 2011 the Bank had 1.2bn of loans classified as remaining to transfer to NAMA. Since the period end, NAMA have confirmed that they will not now be acquiring 0.9bn of these loans.
Customer funding Customer funding decreased by 10.4bn to 0.7bn in the period, primarily as a result of the transfer of 8.3bn of customer deposits to AIB and AIB UK under the AIB Transfer Order. Remaining deposits are primarily related to lending facilities. Market and central bank funding Borrowings from the Central Bank of Ireland under special funding facilities increased to 38.4bn (31 December 2010: 28.1bn). The facilities utilised were a Special Master Repurchase Agreement (SMRA), a Master Loan Repurchase Agreement (MLRA) and a Facility Deed from the Central Bank of Ireland. The majority of the funds were advanced under the SMRA, involving the sale and repurchase of the promissory note. Collateral assigned under the MLRA is derived from the Bank's customer lending assets. The interest rate on these facilities is set by the Central Bank of Ireland and advised at each rollover and is currently linked to the ECB marginal lending facility rate. Borrowings under open market operations decreased to 2.4bn (31 December 2010: 16.9bn). This decline is mainly due to the transfer of NAMA senior bonds to AIB pursuant to the AIB Transfer Order which were eligible collateral for open market operations funding. The total amount of loan assets assigned as collateral under rated securitisation programmes and secured central bank borrowings at 30 June 2011 was 5.9bn (31 December 2010: 13.5bn). This fall is mainly due to certain programmes no longer qualifying as eligible collateral under open market operations. Debt securities in issue Debt securities in issue decreased by 1.2bn to 5.7bn due to the maturity of medium term notes. The Bank has no short term paper in issue. Currency funding
Funding
The Banks funding profile is primarily reliant on deposits from central banks and monetary authorities. As at 30 June 2011 deposits from central banks and monetary authorities totalled 40.8bn representing 86% of total funding (31 December 2010: 45.0bn, 70% respectively). Due to the short term and concentrated nature of its funding base the Bank is not in full compliance with a number of regulatory requirements. The Banks credit ratings were downgraded to sub-investment grade in late 2010 by Standard & Poors and Moodys, and by Fitch in February 2011. The Group became a participant institution in the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (the ELG Scheme) on 28 January 2010 and certain qualifying deposits and securities issued by the Group from this date onwards are covered by the ELG Scheme. The Irish Government has extended the ELG Scheme for certain eligible liabilities to 31 December 2011.
Borrowings from central banks and a large proportion of the Groups other funding balances are denominated in euro while a significant proportion of the Groups lending assets are denominated in sterling and US dollars. As a consequence the Group has made extensive use of foreign currency derivatives with market counterparties and the National Treasury Management Agency (NTMA) to manage the currency profile of its balance sheet. The Bank has a contingency euro-sterling swap agreement in place with the Central Bank of Ireland, at a market based fee, which is available to assist the Bank in managing currency mismatches that may arise.
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Loans and advances to banks Placements with banks decreased by 1.5bn during the period. The total balance of 2.0bn at 30 June 2011 includes 1.6bn of cash collateral placed with interbank counterparties to offset changes in mark to market valuations arising from derivative contracts and 0.4bn of primarily short term placements with banks. Available-for-sale assets The Bank holds a portfolio of securities that are classified as available-for-sale (AFS). This portfolio comprises sovereign bonds, debt issued by financial institutions and subordinated NAMA bonds. AFS assets total 1.5bn at 30 June 2011, a decrease of 0.7bn from 31 December 2010. During the period 0.3bn of AFS securities matured and the Bank disposed of a further 0.4bn with a loss on disposal of 1m reported in other operating expense. The following table presents the external ratings profile of AFS assets. 30 June 2011 m AAA / AA A BBB+ / BBB / BBBSub investment grade Unrated Total 212 289 726 79 204 1,510 31 December 2010 m 537 683 827 172 2,219
The promissory note has resulted in the Group having significant interest rate risk as it is a fixed rate instrument. The Bank has hedged a total of 4.3bn of the nominal amount using amortising interest rate swaps. A further 5.7bn of economic hedges exist in the form of the Groups capital and fixed rate debt issuance. However significant fixed interest rate exposure remains with limited capacity to hedge further amounts with market counterparties. The promissory note is currently pledged as collateral for funding under the SMRA with the Central Bank of Ireland.
Capital
The regulatory capital resources of the Group include 29.3bn of capital contributed by the Irish Government. These contributions restored the levels of Core Tier 1 regulatory capital following losses incurred by the Bank during the past two years. As at 30 June 2011 the Groups Tier 1 Capital ratio is 12.1% with a Total Capital ratio of 13.7%. The level of surplus regulatory capital above the minimum required 8% Total Capital ratio at 30 June 2011 is 1.8bn. Regulatory capital ratios have increased since 31 December 2010 due to a reduction in risk weighted assets during the six month period of 5.3bn or 14%. This reduction is primarily related to a reduction in lending assets driven by disposals and repayments, particularly in the UK and US markets. Specific impairment charges incurred in the period also reduced the level of risk weighted assets. Due primarily to the promissory note issued by the Minister for Finance, the Bank has 26bn of exposure to the Irish Government at 30 June 2011. The level of this exposure has reduced since 31 December 2010 mainly due to the transfer of NAMA senior bonds to AIB in February 2011, and payment of the first instalment of the promissory note. Irish Government exposure is risk weighted at 0% in line with the requirements of the Capital Requirements Directive and guidance from the Central Bank of Ireland. The Group adopts the Basel II Standardised Approach in calculating its minimum capital requirements.
Senior bank bonds account for 65% of holdings, euro denominated sovereign 21% and other bonds 14%. Of the total bank bonds included within the portfolio 0.4bn, or 26%, relate to bonds issued by Irish banks covered under the Irish Government guarantee scheme. The movement in subinvestment grade holdings is due to rating downgrades in the period on bonds held at 31 December 2010. All bonds are reviewed for impairment on an individual basis, with impairment charges reflected in the income statement. There has been no impairment of AFS securities during the period. The closing market value of the AFS portfolio at 30 June 2011 is 1.5bn. Promissory note The Minister for Finance, as the Banks sole shareholder, has provided the Bank with a promissory note to the value of 25.3bn comprising four tranches. The promissory note pays 10% of the initial principal amount of each tranche annually. On 31 March 2011, the Bank received the first instalment of 2.53bn resulting in the promissory note having a revised principal amount of 23.6bn from 31 March 2011.
13
Restructuring
Pursuant to a direction order made by the Irish High Court under Section 9 of CISA on 8 February 2011 the Bank was directed to (a) reduce its net lending in line with forecasts derived from the Restructuring Plan, (b) formulate a detailed steps plan for the rationalisation and, where appropriate, closure of the Banks UK offices and its branches in Dusseldorf, Vienna and Jersey and submit it to the NTMA by 31 March 2011, (c) formulate a detailed steps plan for the disposal of the Banks Wealth Management business and submit it to the NTMA by 31 March 2011, (d) formulate in conjunction with INBS a detailed steps plan for the Banks acquisition of/merger with INBS and submit it to the NTMA by 31 March 2011 and (e) transfer the remaining eligible loan assets (as defined in the National Asset Management Agency Act 2009) to NAMA by the later of 31 December 2011 or the completion of any ongoing litigation delaying transfer of those loans. On 31 March 2011, the Bank submitted the three steps plans referred to at (b), (c) and (d) above to the NTMA. On 7 April 2011 the Minister for Finance issued certain requirements to the Bank under Section 50 of CISA pursuant to which the Bank was obliged to implement in all material respects, with the approval of the NTMA, the high level steps plans appended thereto in relation to (i) the rationalisation and, where appropriate, closure of the Banks UK offices and
its branches in Dusseldorf, Vienna and Jersey, (ii) the disposal of the Banks Wealth Management business and (iii) the Banks acquisition of/merger with INBS. The Bank was also required to prepare, in conjunction with INBS and the NTMA, a high level restructuring and work out steps plan, based on the Restructuring Plan (the High Level Steps Plan) and, subject to the approval of the NTMA, implement that High Level Steps Plan, subject to any variations directed by the EC. The Bank is proceeding to implement the High Level Steps Plan, following its approval by the NTMA on 20 June 2011. The Banks branches in Vienna and Jersey closed in June 2011. As set out in note 41, Events after the reporting period, the assets and liabilities of INBS (subject to certain limited excluded liabilities) transferred to the Bank by way the INBS Transfer Order. Further, the Banks branch in Dusseldorf is scheduled to formally close shortly (all customer deposits have been repaid). The Group is examining the potential sale of its Wealth Management business and has received non-binding indicative proposals from various potential acquirers. A number of these prospective purchasers have been invited to further progress their assessment of the business and a subsequent phase of due diligence has since commenced. No final decision however has yet been taken by the Board to dispose of the business and evaluation of the alternative proposals is ongoing.
Costs
Operating expenses 6 months ended 30 June 2011 m 56 60 12 128 29 157 6 months ended 30 June 2010 m 67 40 12 119 14 133 Year ended 31 December 2010 m 130 108 26 264 89 353
Staff costs Other administrative expenses Depreciation and amortisation Recurring operating expenses Exceptional costs Total operating expenses
Total recurring operating expenses for the six months to 30 June 2011 are 128m and exceptional costs are 29m. Staff costs have fallen by 16% in the six months to 30 June 2011 compared with the comparative period reflecting a 17% reduction in average employees primarily due to 210 staff transferring to AIB and AIB UK as a result of the AIB Transfer Order. The Group headcount at 30 June 2011 is 1,075, a reduction of 221 since 31 December 2010, and includes 130 people working in the Banks NAMA unit.
Other administrative costs have increased due to significantly higher professional fees related to loan book asset quality versus the comparative period to June 2010 and other ongoing reviews. Other cost lines continue to remain tightly controlled. Exceptional costs of 29m were incurred in the period and primarily relate to professional fees associated with the Banks restructuring, the NAMA process and ongoing reviews into legacy matters.
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Taxation
No Irish tax will be payable on the Groups Irish business activities due to the availability of losses in the Bank, taking into account projected full year results to December 2011, which are offset against profits within the Group. However a current period foreign tax charge of 6m arises. A deferred tax credit of 2m has been recognised to the extent that it is probable that any potential additional chargeable profits can be offset by current period losses.
Subsequent events and future developments

The key events that have occurred since the end of the period are reviewed in note 41 to the interim financial statements, which includes further detail on the INBS Transfer Order. The Group Chief Executives review and the Chairmans statement review the outlook and future of the Group.
Risks and uncertainties

The Group is subject to a variety of risks and uncertainties in the course of its business activities. The principal risks and uncertainties facing the Bank at present are those related to general economic conditions, Government policy and restructuring risk, ratings downgrades, liquidity and funding risk, the NAMA process, credit risk, operational risk, events of default risk, regulatory compliance risk, market risk, valuation risk, the Fitness and Probity regime, and litigation and legal compliance risk. In addition continued concerns within the banking industry regarding counterparty and country risk could adversely impact on the Bank. More detail is contained in the Principal risks and uncertainties statement on pages 16 to 20.
Gross of impairment provisions and including lending associated with the Groups assurance company
15
Principal risks and uncertainties

The Group is subject to a variety of risks and uncertainties, including in the normal course of its business activities. The Transparency (Directive 2004/109/EC) Regulations 2007 require a description of the principal risks and uncertainties facing the Group for the remaining six months of the financial year. The Board of Directors and senior management have ultimate responsibility for the governance of all risk taking activity and have established a framework to manage risk throughout the Group. Details of the risk management policies and processes that the Group adopts are contained in note 51 to the 2010 Annual Report and Accounts. The business risks and uncertainties below are those risks which the Directors currently believe to be the material and principal risks to the Group for the remaining six months of the financial year. The precise nature of all the risks and uncertainties that the Group faces cannot be predicted and many of these risks are outside of the Groups control. The principal risks and uncertainties outlined below should be read in conjunction with the Chairmans statement and the Group Chief Executives review.
Government policy and restructuring risk

As the Banks only shareholder, and under legislative powers relevant to the Bank, the Minister for Finance is in a position to exert significant influence over the Group. The Bank is also wholly reliant on the support of the Irish Government. Government policy in respect of both the Bank and the wider financial services sector has a major impact on the Group. Changes to government policies or the amendment of existing policies could adversely impact the financial condition and prospects of the Group. For instance, if new governmental policies were to require the Bank to resolve its position over a shorter than expected time frame, projected asset recovery values could be negatively impacted. The speed of deterioration in the Irish economy and the banking sector in the second half of 2010 culminated with the Government, International Monetary Fund (IMF) and the European Union (EU) agreeing a substantial assistance package for the country which included agreements to reorganise and restructure the Irish banking sector, including the Bank. In that respect, the IMF and the EU retain significant influence on the future of the Bank. The Credit Institutions (Stabilisation) Act 2010 (CISA), which was enacted on 21 December 2010 following agreement of the assistance package, gives broad powers to the Minister for Finance, in particular, in relation to: (i) transferring relevant institutions assets and liabilities to facilitate the restructuring of the banking sector; and (ii) achieving appropriate burden sharing by subordinated creditors in relevant institutions that have received State support, on a case by case basis and under particular conditions. The legislation provides the legislative basis for the reorganisation and restructuring of the banking system agreed in the joint EU/IMF Programme and is the first important step in putting in place an extensive Special Resolution Regime (SRR) that will provide for a comprehensive framework to facilitate the orderly management and resolution of distressed credit institutions. (Source: Department of Finance) In this context, the Irish Government submitted a joint restructuring plan and work-out plan in respect of the Bank and Irish Nationwide Building Society (INBS) to the European Commission (EC) on 31 January 2011 (Restructuring Plan). The Restructuring Plan had been prepared in conjunction with the Department of Finance and the National Treasury Management Agency (NTMA). A direction order (the Direction Order) was made by the Irish High Court under Section 9 of CISA on 8 February 2011 under which the Bank was directed to (a) reduce its net lending in line with forecasts derived from the Restructuring Plan, (b) formulate a detailed steps plan for the rationalisation and, where appropriate, closure of the Banks UK offices and its branches in Dusseldorf, Vienna and Jersey and submit it to the NTMA by 31 March 2011, (c) formulate a detailed steps plan for the disposal of the Banks Wealth Management business and submit it to the NTMA by 31 March 2011, (d) formulate in conjunction with INBS a detailed steps plan for the Banks acquisition of/merger with INBS and submit it to the NTMA by 31 March 2011, (e) transfer the remaining eligible loan assets (as defined in the National Asset Management Agency Act 2009 (the NAMA Act)) to the National Asset Management Agency (NAMA) by the later of 31 December 2011 or the completion of any ongoing litigation delaying transfer of those loans and (f) take certain steps in connection with an auction process to be operated by the NTMA in connection with the transfer of certain of the Banks deposits and assets.
General economic conditions

The Groups results are influenced by general economic and other business conditions in the Groups three key markets: Ireland, the UK and the US. Notwithstanding a tentative return to export-led growth in Ireland, economic conditions in Ireland remain challenging and consequently the results of the Group have been adversely affected. Ireland continues to experience high unemployment, subdued consumer confidence and a continued decline in domestic commercial activity. Also, although Ireland is currently adhering to the conditions of the EU/IMF Programme of Financial Support for Ireland, recent months have seen an escalation of the sovereign debt crisis at a European level, which poses risks to overall economic stability and economic recovery both in Ireland and in Europe in general. In addition, austerity measures introduced in the December 2010 budget continue to define domestic business sentiment. Continued deterioration in property prices could further adversely affect the Groups financial condition and results of its operations. The Groups financial performance may also be affected by future recovery rates on assets and the historical assumptions underlying asset recovery may no longer be accurate given the general economic situation. While the UK and US have returned to modest growth, conditions remain uncertain surrounding the sustainability of both the global and relevant regional economic recoveries, particularly if fiscal and monetary supports are withdrawn. In the UK, there is the risk that a slow down in the demand for goods and services due to UK Government spending cutbacks and higher taxes could have a negative effect on the countrys modest economic recovery. As a result, unemployment could increase, and residential and commercial property would suffer a second period of falling prices.
16
Principal risks and uncertainties continued
On 24 February 2011, the Irish High Court made a transfer order under Section 34 of CISA pursuant to which the majority of the Banks Irish and UK deposit books, certain NAMA bonds and the Banks shares in its wholly-owned deposit-taking Isle of Man subsidiary, Anglo Irish Bank Corporation (International) PLC were transferred to Allied Irish Banks, p.l.c. (AIB) and AIB Group (UK) p.l.c. (AIB UK) (the AIB Transfer Order). On 31 March 2011, the Bank submitted the three steps plans referred to at (b), (c) and (d) above to the NTMA. On 7 April 2011 the Minister for Finance issued certain requirements (Ministerial Requirements) to the Bank under Section 50 of CISA pursuant to which the Bank was obliged to implement in all material respects, with the approval of the NTMA, the high level steps plans appended thereto in relation to (i) the rationalisation and, where appropriate, closure of the Banks UK offices and its branches in Dusseldorf, Vienna and Jersey, (ii) the disposal of the Banks Wealth Management business and (iii) the Banks acquisition of/merger with INBS. The Bank was also required to prepare, in conjunction with INBS and the NTMA, a high level restructuring and work out steps plan, based on the Restructuring Plan (the High Level Steps Plan) and, subject to the approval of the NTMA, implement that High Level Steps Plan, subject to any variations directed by the EC. The Bank is proceeding to implement the High Level Steps Plan, following approval by the NTMA on 20 June 2011. The Restructuring Plan, which was approved by the EC on 29 June 2011, provides for the amalgamation of the Bank with INBS and sets out in detail how the loan books of the combined entity will be resolved over a period of up to ten years. To ensure that the assets are managed in a way consistent with the resolution of the combined entity, certain commitments are now binding upon the Bank, including a commitment that it cannot enter into new activities. The Bank has prepared an operating plan which is intended to form the basis for the implementation of the Restructuring Plan and the High Level Steps Plan. The operating plan focuses on accelerated deleveraging of the Bank, and includes the accelerated disposal of its US loan portfolio and the disposal or wind-down of its Wealth Management division in accordance with the Restructuring Plan, the Direction Order, the Ministerial Requirements and the High Level Steps Plan. The suggested initiatives will be subject to operational challenges and market dependencies in respect of timing and optimal pricing, which will increase the execution risk of the operating plan. Note 41, Events after the reporting period, confirms that, since 30 June 2011, the assets and liabilities (subject to certain limited excluded liabilities) of INBS transferred to the Bank by way of a High Court transfer order under Section 34 of CISA on 1 July 2011 (the INBS Transfer Order). The operational risks associated with the implementation of the transfer could have an adverse impact on the financial condition and operations of the combined Group, while the pending finalisation of transfer value attaches financial risks to the integration of the Bank and INBS which have yet to be verified.
Ratings downgrades Bank and Sovereign

During the first six months of 2011, the Banks long-term Standard & Poors (S&P) counterparty credit rating was downgraded by three notches to CCC and remains below investment grade. Similar action was taken by Moodys during the period (rating cut from Ba3 to Caa2) and by Fitch (rating cut from BBB- to BB-). In taking these rating actions, credit rating agencies cited concerns about the Irish Governments publically indicated preference to impose losses on the Group's senior unsecured and unguaranteed debt holders. Also during the period the Irish Sovereigns senior debt suffered further credit rating downgrades. S&P lowered their rating from A to BBB+, Moodys adjusted their rating from Baa1 to Baa3, and Fitch reduced their rating from BBB+ (Stable) to BBB+ (Negative).
Liquidity and funding risk

Liquidity and funding risk is the risk that the Group does not have sufficient financial resources available at all times to meet its contractual and contingent cash flow obligations or can only secure these resources at excessive cost. This risk is inherent in all banking operations and can be affected by a range of institution-specific and market-wide events. The Groups liquidity may be adversely affected by a number of factors, including significant unforeseen changes in interest rates, ratings downgrades, higher than anticipated losses on loans and disruptions in the financial markets generally. In response to major market instability and illiquidity, governments and central banks around the world have intervened in order to inject liquidity and capital into financial markets, and, in some cases, to prevent the failure of systemically important financial institutions. These various initiatives to stabilise financial markets are subject to revocation or change, which could have an adverse effect on the availability of funding to the Group. In common with many other banks, the Groups access to traditional sources of liquidity remains constrained. The Bank has experienced greater reliance on Government and monetary authority support mechanisms due to significant customer deposit outflows and the maturity of debt securities. The Banks continued reliance on support from central banks includes access to special funding facilities, a key factor in ensuring successful implementation of the operating plan as well as adapting to potential regulatory developments. The funding support from central banks and monetary authorities amounted to 40.8bn at 30 June 2011, representing 86% of total funding, and included 38.4bn borrowed under special liquidity facilities. This support increased from December 2010 (70% of total funding) following the transfer of certain Irish and UK deposits and NAMA bonds to AIB and AIB UK under the AIB Transfer Order. Should monetary authorities materially change their eligibility criteria or limit the Banks access to such special funding facilities without providing an alternative funding source, this would adversely affect the Groups financial condition and prospects. Additionally, credit rating downgrades may impact on the eligibility of assets currently pledged as collateral for central bank open market sale and repurchase agreements.
17
NAMA
The Bank continues to be designated as a participating institution in NAMA. The NAMA Act provides for the acquisition by NAMA from participating institutions of eligible bank assets, which may include performing and nonperforming loans made for the purpose, in whole or in part, of purchasing, exploiting or developing development land and loans associated with these loans. As NAMA reserves the right to adjust the consideration paid for assets previously transferred when the due diligence is completed, the final adjustment to transfer values will only be determined when full due diligence in respect of the assets has been completed. These adjustments have the potential to be either positive or negative, depending on the assessment of the underlying loans. At 30 June 2011 the Bank had 1.2bn of loans remaining to transfer to NAMA. This amount has subsequently been reduced by 0.9bn due to a decision by NAMA that it will not be acquiring certain loans previously listed as NAMA eligible assets (see note 41). Not all of the remaining assets may ultimately transfer to NAMA. The Group may be required to indemnify NAMA in respect of various matters, including NAMAs potential liability arising from any error, omission, or misstatement on the part of the Group in information provided to NAMA. In addition, the EC may assess the compatibility and price of the transferred assets and could invoke a claw-back mechanism in the case of excess payments. The NAMA Act provides that up to five per cent of the debt securities that will be issued to a participating institution may be subordinated. If NAMA ultimately makes a loss, the Group may not recover the full value of those subordinated bonds. Notwithstanding these uncertainties, the transfer of assets to NAMA is a fundamental part of the Banks restructuring process and has served as the primary mechanism for deleveraging the balance sheet, reducing credit risk exposure and providing additional liquidity.
at prices that are not sufficient to recover the full amount of the loan, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those currently being experienced. As a result of the integration of the INBS business into the Group pursuant to the Restructuring Plan, the Direction Order, the Ministerial Requirements and the High Level Steps Plan, the Bank will have exposure to residential mortgages, which have a higher reliance on sustained employment levels to ensure continued servicing of existing debt. Note 41 confirms that, since the end of the reporting period, the assets and liabilities (subject to certain limited excluded liabilities) of INBS transferred to the Bank by way of the INBS Transfer Order. The Irish property market remains severely impacted by a lack of confidence and liquidity which has led to further reductions in property collateral values. This, together with an extremely difficult operating environment in the Groups key markets, particularly in Ireland, and the erosion of clients net worth has resulted in a substantial deterioration in the asset quality of the Banks loan book. The Groups financial performance will be affected by future recovery rates on loan assets. Any further deterioration in property prices, any failure of prices to recover to their long term averages or any delay in realising collateral secured on these loan assets will further adversely affect the Groups financial condition and results of operations. Following the approval of the Restructuring Plan by the EC, the Group is also exposed to additional recovery risk given that counterparties are aware that the plan provides for an orderly work out of its loan book over a period of years as well as being dependent on efficient execution of debt restructurings where required. As a result, amounts recoverable may be reduced.
Operational risk
Operational risk is the risk of loss arising from inadequate controls and procedures, unauthorised activities, outsourcing, human error, systems failure and business continuity. Operational risk is inherent in every business organisation and covers a wide spectrum of issues. The Groups management of its exposure to operational risk is governed by a policy prepared by Group Risk Management and approved by the Risk and Compliance Committee. The Groups exposure to operational risk is elevated due to the transitional support arrangements in place following the making of the AIB Transfer Order, which resulted in the immediate transfer of the majority of the Banks Irish and UK deposit books and certain NAMA bonds to AIB and AIB UK. Furthermore, given the ECs approval of the Restructuring Plan by the EC on 29 June 2011, which envisaged the transfer of the INBS business into the Bank and orderly work out of the combined entitys loan book over ten years, there is the added risk of a weakened control environment while the Group implements the operational plan to give effect to the approved Restructuring Plan and High level Steps Plan. The lack of career prospects and incentives in the medium term may lead to loss of staff and disillusionment among remaining staff, with an increased associated risk of material error. Separately, the current economic climate increases the risk of the occurrence of fraud.
Credit risk
Credit risk is the risk that the Group will suffer a financial loss from a counterpartys failure to pay interest, repay capital or meet a commitment, and the collateral pledged as security is insufficient to cover the payments due. It arises primarily from the Groups lending activities to customers, interbank lending and repurchase agreements, investment in available-for-sale debt securities and derivative transactions. Adverse changes in the credit quality of the Groups borrowers, counterparties and their guarantors, and adverse changes arising from the general deterioration in global economic conditions, have reduced the recoverability of the Groups loan assets and have continued to increase the quantum of impaired loans and impairment charges during the period. The Group has exposures to a range of customers in different geographies, including exposures to investors in, and developers of, commercial and residential property. Irish property prices continued to show significant declines throughout the last year and developers of commercial and residential property are facing particularly challenging market conditions, including substantially lower prices and volumes. In addition, the Groups exposure to credit risk is exacerbated when the collateral it holds cannot be realised or is liquidated
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Events of default risk

The Group's debt securities programmes and subordinated capital instruments contain contractual covenants and terms for events of default which, if breached or triggered, could result in an actual or potential default that might result in the debt concerned becoming payable immediately, or other adverse consequences occurring. CISA includes important provisions that are designed to prevent rights in respect of a potential event of default, or an event of default becoming exercisable because of the making orders or issuing of certain requirements under CISA or anything done on foot of such an order or requirements, including implementation of the High Level Steps Plan. CISA provides that orders or requirements made under CISA may take effect as a reorganisation measure under the Credit Institutions Reorganisation and Winding Up Directive (CIWUD) and any law giving effect to it. The relevant protective provisions of CISA apply in relation to the Direction Order, the AIB Transfer Order, the Ministerial Requirements and the INBS Transfer Order. Each such order and requirement was declared to be a reorganisation measure for the purposes of CIWUD. Accordingly, CISA and laws giving effect to CIWUD confer important protections to the Bank with respect to the laws of EU member states against certain default risks in respect of the matters and timelines contained in the relevant orders and requirements. With regard to litigation in the US in connection with alleged breaches of covenant in the documentation governing certain subordinated loan notes governed by New York Law, see the disclosure concerning legal claims referred to in note 35 to the interim financial statements.
Changes in government policy, legislation or regulatory interpretation applying to the financial services industry may adversely affect the Groups capital requirements and, consequently, reported results and financing requirements. These changes include possible amendments to government and regulatory policies and solvency and capital requirements.
Market risk
Market risk is the risk of a potential adverse change in the Groups income or financial position arising from movements in interest rates, exchange rates or other market prices. Changes in interest rates and spreads may affect the interest rate margin realised between income on lending assets and borrowing costs. While the Group has implemented risk management methods to mitigate and control these and other market risks to which it is exposed, it is difficult to accurately predict changes in economic or market conditions and to anticipate the effects that such changes could have on the Group. Borrowings from central banks and a large proportion of the Groups other funding balances are denominated in euro while some of the Groups lending assets are denominated in sterling and US dollars. As a consequence, the Group has made extensive use of foreign currency derivatives to manage the currency profile of its balance sheet during the period. Continued access to market participants is required to enable the Group to continue with this risk management strategy. The promissory note, which is a fixed rate instrument, has resulted in the Group having significant interest rate risk exposure. The Bank has hedged a total of 4.3bn of the nominal amount using interest rate swaps. A further 5.7bn of economic hedges exist in the form of the Groups capital and fixed rate debt issuance. However, significant fixed rate exposure remains, with limited capacity to hedge further amounts with market counterparties. In current market circumstances it is envisaged that the Bank will have to continue to rely on support mechanisms provided by monetary and governmental authorities.
Regulatory compliance risk

Regulatory compliance risk primarily arises from a failure or inability to comply fully with the laws, regulations, standards or codes applicable specifically to regulated entities in the financial services industry. The Bank is not in full compliance with all Irish regulatory requirements. While the Bank ensures that the relevant Authorities are kept fully informed in this regard, non-compliance may result in the Group being subject to regulatory sanctions, material financial loss and/or loss of reputation. Regulatory risk also includes tax compliance risk, which is the risk associated with changes in tax law or in the interpretation of tax law. It also includes the risk of changes in tax rates and the risk of failure to comply with procedures required by tax authorities. Failure to manage tax risk effectively could lead to additional tax charges. It could also lead to financial penalties for failure to comply with required tax procedures or other aspects of tax law. The Group is subject to the application and interpretation of tax laws in all countries in which it operates. In relation to any tax risk, if the costs associated with the resolution of the matter are greater than anticipated, it could negatively impact the financial position of the Group. Capital risk is the risk that the Group has insufficient capital resources to meet its minimum regulatory capital requirements. Losses incurred by the Bank during the past two years have placed significant stress on the Bank's regulatory capital resources and resulted in the Minister for Finance, as the Banks sole shareholder, providing 29.3bn of capital. The Groups Total Capital ratio at 30 June 2011 is 13.7% which represents 1.8bn of surplus capital above the 8% minimum requirement. Further losses as well as any increased capital requirements could again lead to regulatory capital concerns in the future.
Valuation risk
To establish the fair value of financial instruments, the Group relies on quoted market prices or, where the market for a financial instrument is not sufficiently active, internal valuation models that utilise observable market data. In certain circumstances, observable market data for individual financial instruments or classes of financial instruments may not be available. The absence of quoted prices in active markets increases reliance on valuation techniques and requires the Group to make assumptions, judgements and estimates to establish fair value. In common with other financial institutions, these internal valuation models are complex, and the assumptions, judgements and estimates the Group is required to make often relate to matters that are inherently uncertain. These judgements and estimates are updated to reflect changing facts, trends and market conditions and any resulting change in the fair values of the financial instruments could have an adverse effect on the Groups earnings and financial position.
19
Fitness and probity regime

The Central Bank of Ireland recently announced forthcoming Regulations and Standards of Fitness and Probity, issued under Part 3 of the Central Bank Reform Act 2010 (2010 Act). The 2010 Act provides for a fitness and probity regime for the review of individuals performing controlled functions and pre-approval controlled functions, including directors and chief executive officers, in regulated financial service providers other than credit unions. Where the review causes the Head of Financial Regulation of the Central Bank of Ireland to form the opinion that there is reason to suspect the persons fitness and probity to perform the relevant function, an investigation may be conducted which may result in a prohibition notice being issued preventing the person from carrying out the function. The Group could suffer reputational damage or adverse financial performance if any issues were to arise under the fitness and probity regime.
Litigation and legal compliance risk

The Groups business is subject to the risk of litigation by investors, counterparties, customers, employees, prenationalisation shareholders or other third parties through private actions, class actions, administrative proceedings, regulatory actions, criminal proceedings or other litigation. The outcome of any such litigation, proceedings or actions is difficult to assess or quantify. The cost of defending future proceedings or actions may be significant. As a result, such litigation, proceedings or actions may adversely affect the Groups business, financial condition, results, operations or reputation. In the period since December 2008, various regulatory bodies in Ireland have initiated investigations (including in some cases, criminal investigations) into certain aspects of the Banks business, including certain loan and other transactions involving former Directors and certain third parties. These investigations are ongoing and it is not possible at this stage to give any indication as to whether these investigations will result in civil, administrative or criminal proceedings against the Bank or any of its current or former Directors or officers. Due to the complexity of the anticipated restructuring of the Bank, there is a potential for unforeseen legal risks to arise.
20
Statement of Directors responsibilities

The Directors are responsible for preparing the Interim Report in accordance with International Accounting Standard 34 (IAS 34), the Transparency (Directive 2004/109/EC) Regulations 2007 and the Transparency Rules of the Irish Financial Services Regulatory Authority. The Directors confirm that the condensed set of financial statements has been prepared in accordance with IAS 34 and that it gives a true and fair view of the assets, liabilities, financial position and loss of the Group and that, as required by the Transparency (Directive 2004/109/EC) Regulations 2007, the Interim Report includes a fair review of: important events that have occurred during the six months ended 30 June 2011; the impact of those events on the condensed financial statements; a description of the principal risks and uncertainties for the remaining six months of the financial year; and details of any related party transactions that have materially affected the Groups financial position or performance in the six months ended 30 June 2011.
Directors: Alan Dukes (Chairman) A.M.R. (Mike) Aynsley (Group Chief Executive) Gary Kennedy (Non-executive Director) Secretary: Dr. Max Barrett
21
Consolidated income statement (unaudited)

For the 6 months ended 30 June 2011
6 months ended 30 June 2011 m 1,189 (717) 2 3 3 4 5 6 7 472 33 (2) (17) 3 17 489 8 (145) (7) (5) (157) 332 10 11 12 13 (214) 601 (40) (778) (99) (2) (101) 14 (4) (105) 6 months ended 30 June 2010 m 1,098 (746) 352 23 (41) 1 (23) (28) (68) 284 (121) (8) (4) (133) 151 (3,468) (4,853) (8,170) (40) (8,210) (8,210) Year ended 31 December 2010 m 2,304 (1,562) 742 47 (58) (41) (23) 1,589 (104) 1,410 2,152 (327) (16) (10) (353) 1,799 (11,547) (7,767) (17,515) (104) (17,619) (32) (17,651)
Note Interest and similar income Interest expense and similar charges Net interest income Fee and commission income Fee and commission expense Net trading (expense)/income Financial assets designated at fair value Gain on liability management exercise Other operating income/(expense) Other income/(expense) Total operating income Administrative expenses Depreciation Amortisation of intangible assets - software Total operating expenses Operating profit before disposals and provisions Loss on transfer of assets and liabilities Loss on disposal of assets to NAMA Loss on disposal of other financial assets Provisions for impairment and other provisions Operating loss Share of results of joint ventures Loss before taxation Taxation Loss for the period Attributable to: Owner of the parent: Non-controlling interests:
(104) (1) (105)
(8,210) (8,210)
(17,651) (17,651)
The notes on pages 30 to 79 form an integral part of the condensed interim financial statements.
22
Consolidated statement of comprehensive income (unaudited)

6 months ended 30 June 2011 m (105) 6 months ended 30 June 2010 m (8,210) Year ended 31 December 2010 m (17,651)
Note Loss for the period Other comprehensive income Net actuarial losses in retirement benefit schemes, after tax Net change in cash flow hedging reserve, after tax Net change in available-for-sale reserve, after tax Foreign exchange translation Other comprehensive income for the period, after tax Total comprehensive income for the period Attributable to: Owner of the parent: Non-controlling interests 9 33 33 33 34
(5) (15) 24 (30) (26) (131)
(16) (24) (11) 37 (14) (8,224)
(7) (53) 17 59 16 (17,635)
(130) (1) (131)
(8,224) (8,224)
(17,635) (17,635)
23
Consolidated statement of financial position (unaudited)

As at 30 June 2011
Note Assets Cash and balances with central banks Financial assets at fair value through profit or loss - held on own account - held in respect of liabilities to customers under investment contracts Derivative financial instruments Loans and advances to banks Assets classified as held for sale Amount due from Shareholder Available-for-sale financial assets Promissory note Government debt securities at amortised cost Loans and advances to customers Interests in joint ventures Intangible assets - software Investment property - held on own account - held in respect of liabilities to customers under investment contracts Property, plant and equipment Current taxation Retirement benefit assets Deferred taxation Other assets Prepayments and accrued income Total assets Liabilities Deposits from banks Customer accounts Derivative financial instruments Debt securities in issue Liabilities to customers under investment contracts Current taxation Other liabilities Accruals and deferred income Retirement benefit liabilities Subordinated liabilities and other capital instruments Total liabilities Share capital Share premium Capital reserve Other reserves Retained earnings Shareholders' funds Non-controlling interests Total equity Total equity and liabilities 30 June 2011 m 31 December 2010 m 30 June 2010 m
15 16 28 17 18 19 20 21 22 23 24
255 13 215 1,888 2,030 6,822 1,510 23,804 259 15,471 38 12 90
181 13 237 1,936 3,525 1,640 2,219 25,704 10,623 24,364 42 16 217 1,193 19 91 1 46 87 29 72,183
79 79 239 2,742 8,032 16,886 8,580 4,622 10,407 4,061 29,478 108 20 254 1,228 22 60 63 40 23 87,023
28
1,168 17 91 46 314 38 54,081
25 26 17 27 28 29 9 30
41,225 689 1,828 5,684 322 50 312 89 3 475 50,677 4,123 1,156 25,300 (150) (27,025) 3,404 3,404 54,081
46,566 11,092 2,460 6,912 351 48 575 135 509 68,648 4,123 1,156 25,300 (129) (26,916) 3,534 1 3,535 72,183
33,301 23,156 4,391 16,518 366 2 193 114 9 2,447 80,497 4,123 1,156 18,880 (150) (17,484) 6,525 1 6,526 87,023
31 32 33
24
Attributable to owner of the parent Other reserves NonShare capital m Total m Share premium m Capital distributable reserve capital m m Exchange translation m Cash flow hedging m Availablefor-sale m Retained earnings m controlling interests m NonTotal equity m
6 months ended 30 June 2011 4,123 1,156 25,300 1 3 57 (190) (26,916) 3,534 1 3,535
Balance at 31 December 2010
Total comprehensive income (104) (104) (1) (105)
Loss for the period
Other comprehensive income (net of tax): 4,123 1,156 25,300 1 (27) 42 (30) (15) (30) 24 (166) 24 (15) (5) (109) (27,025) (5) (15) 24 (30) (130) 3,404 (1) (5) (15) 24 (30) (131) 3,404
Net actuarial losses in retirement benefit schemes
Net change in cash flow hedging reserve
Net change in available-for-sale reserve
Foreign exchange translation
Transactions with owner
Capital contribution
Balance at 30 June 2011
Consolidated statement of changes in equity (unaudited)
25
26
Attributable to owner of the parent Other reserves NonExchange translation m Total m Cash flow hedging m Availablefor-sale m Retained earnings m controlling interests m Total equity m Share capital m Share premium m Capital reserve m Nondistributable capital m
6 months ended 30 June 2010 4,123 1,156 8,300 1 (56) 110 (207) (9,258) 4,169 1 4,170
Total comprehensive income (8,210) (8,210) (8,210)
Loss for the period
Other comprehensive income (net of tax): 4,123 1,156 18,880 1 (19) 10,580 10,580 86 37 (24) 37 (11) (218) (11) (24) (16) (8,226) (17,484) (16) (24) (11) 37 (8,224) 10,580 10,580 6,525 1 (16) (24) (11) 37 (8,224) 10,580 10,580 6,526
Transactions with owner
Consolidated statement of changes in equity (unaudited) (continued)
Balance at 30 June 2010
Attributable to owner of the parent Other reserves NonExchange translation m Total m Cash flow hedging m Availablefor-sale m Retained earnings m controlling interests m Total equity m Share capital m Share premium m Capital reserve m Nondistributable capital m
Year ended 31 December 2010 4,123 1,156 8,300 1 (56) 110 (207) (9,258) 4,169 1 4,170
Total comprehensive income (17,651) (17,651) (17,651)
Loss for the period
Other comprehensive income (net of tax): 59 (53) 59 17 17 (53) (7) (17,658) (7) (53) 17 59 (17,635) (7) (53) 17 59 (17,635)
Transactions with owners 17,000 17,000 17,000 17,000 17,000 17,000
Balance at 31 December 2010 4,123 1,156 25,300 1
57
(190)
(26,916)
3,534
3,535
27
Consolidated statement of cash flows (unaudited)

6 months ended 30 June 2011 m (101) 778 214 (601) 40 (644) (75) (19) (5) 36 (578) (991) Changes in operating assets and liabilities Net (decrease)/increase in deposits from banks Net decrease in customer accounts Net (decrease)/increase in debt securities in issue Promissory note principal repayment received Net decrease/(increase) in loans and advances to customers and assets classified as held for sale Net (increase)/decrease in loans and advances to banks Net decrease/(increase) in assets held in respect of liabilities to customers under investment contracts Net decrease in investment contract liabilities Net decrease in financial assets at fair value through profit or loss held on own account Net movement in derivative financial instruments Net decrease/(increase) in other assets Net (decrease)/increase in other liabilities Exchange movements Net cash flows from operating activities before taxation Tax paid Net cash flows from operating activities Cash flows from investing activities (note a) Cash flows from financing activities (note b) Net decrease in cash and cash equivalents Opening cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Closing cash and cash equivalents 36 (6,332) (2,055) (1,228) 2,530 3,004 (164) 47 (29) (576) 34 (214) (9) (5,983) (5,983) 5,020 (1) (964) 1,569 (25) 580 330 (4,058) 1,370 (1,929) (1,722) (80) (17) 39 1,426 (11) (18) (135) (4,857) (4,857) 3,500 (9) (1,366) 4,779 93 3,506 13,595 (16,122) (8,522) 1,385 746 (43) (32) 105 309 (66) 179 (48) (9,185) (2) (9,187) 5,985 (48) (3,250) 4,779 40 1,569 6 months ended 30 June 2010 m (8,210) 4,853 3,468 (94) (10) (67) 13 (5) (52) Year ended 31 December 2010 m (17,619) 7,767 11,547 (1,589) (433) (146) (104) 25 (119) (671)
Note Cash flows from operating activities Loss before taxation Provisions for impairment Loss on transfer of assets and liabilities Loss on disposal of assets to NAMA Loss on disposal of other financial assets Gain on liability management exercise Interest earned on promissory note Interest earned on Government debt securities at amortised cost Interest earned on available-for-sale financial assets Financing costs of subordinated liabilities and other capital instruments Other non-cash items
28
6 months ended 30 June 2011 m (a) Cash flows from investing activities Purchases of available-for-sale financial assets Sales and maturities of available-for-sale financial assets Interest received on available-for-sale financial assets net of associated hedges Interest received on Government debt securities at amortised cost Proceeds on transfer of assets and liabilities Proceeds on disposals of other financial assets Purchases of property, plant and equipment Additions to intangible assets - software Investments in joint venture interests Distributions received from joint venture interests Purchases of investment property held on own account Proceeds on disposals of investment property held on own account Net cash flows from investing activities (b) Cash flows from financing activities Repurchase of subordinated liabilities and other capital instruments Coupons paid on subordinated liabilities and other capital instruments Net cash flows from financing activities (1) (1) (7) 716 27 55 3,719 512 (1) (2) (1) 2 5,020
6 months ended 30 June 2010 m (540) 3,950 99 (3) (2) 1 (12) 7 3,500
Year ended 31 December 2010 m (756) 6,571 169 14 (1) (5) (3) 2 (13) 7 5,985
(9) (9)
(23) (25) (48)
29
Notes to the interim financial statements

Index to the notes to the interim financial statements
Note 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 Basis of preparation Net interest income Fee and commission income and expense Net trading (expense)/income Financial assets designated at fair value Gain on liability management exercise Other operating income/(expense) Administrative expenses Retirement benefits Loss on transfer of assets and liabilities Loss on disposal of assets to NAMA Loss on disposal of other financial assets Provisions for impairment and other provisions Taxation Cash and balances with central banks Financial assets at fair value through profit or loss - held on own account Derivative financial instruments Loans and advances to banks Assets classified as held for sale Amount due from Shareholder Available-for-sale financial assets Promissory note Government debt securities at amortised cost Loans and advances to customers Deposits from banks Customer accounts Debt securities in issue Liabilities to customers under investment contracts Other liabilities Subordinated liabilities and other capital instruments Share capital Capital reserve Other reserves Income tax effects relating to other comprehensive income Contingent liabilities, commitments and other contingencies Statement of cash flows Risk management Fair value hierarchy Capital resources Related party transactions Events after the reporting period Approval Page 31 34 35 35 36 36 36 37 38 39 40 40 41 42 42 42 43 44 45 46 46 48 49 50 51 51 52 52 53 54 55 55 56 57 58 59 60 73 74 77 78 79
30
1.
Basis of preparation
1.1 Basis of preparation The Interim Report for the six months ended 30 June 2011 has been prepared in accordance with the requirements of the European Union (EU) Transparency Directive and International Accounting Standard ('IAS') 34 Interim Financial Reporting, as adopted by the EU and implemented into Irish law. It should be read in conjunction with the Groups financial statements for the year ended 31 December 2010 which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and applicable as at that date. The accounting policies applied in preparing the condensed interim financial statements are consistent with those set out in the 2010 Annual Report and Accounts. The financial statements are presented in euro, rounded to the nearest million. Both the figures for the six months ended 30 June 2011 and for the six months ended 30 June 2010 presented in the condensed interim financial statements are unaudited. The summary financial statements for the year ended 31 December 2010, as presented, represent an abbreviated version of the Groups full statutory accounts for that year, which have been filed in the Companies Registration Office in Ireland. These condensed interim financial statements do not comprise statutory accounts within the meaning of Section 19 of the Companies (Amendment) Act, 1986. In preparing the financial statements for the six months ended 30 June 2011 the Directors have considered the appropriateness of the use of the going concern basis. Following an assessment the Directors have determined that it is reasonable to conclude that the Bank will continue in operational existence for the foreseeable future and therefore that it is appropriate to continue to prepare the financial statements on a going concern basis. In making the assessment, the Directors considered the principal risks and uncertainties facing the Bank which include its liquidity and funding position, regulatory capital requirements, implementation of the joint restructuring and work-out plan for the Bank and Irish Nationwide Building Society (INBS) (the Restructuring Plan), the impact of general economic conditions and the impact of the EU/IMF Programme of Financial Support for Ireland. In making the assessment, the Directors believe that European Commission (EC) approval of the Banks Restructuring Plan on 29 June 2011 provides renewed comfort surrounding the adequacy of capital and the continuing access to liquidity and funding facilities. From a capital perspective the approved Restructuring Plan does not forecast an additional requirement above what has already been committed. The capital position is also supported by the announcement by the Central Bank of Ireland on 31 May 2011 that, since the total capital injections were made on the basis of loss estimates that have been found by an expert independent reviewer to be reasonable, their analysis did not indicate that additional capital is required. Following the transfer of the majority of the Banks customer deposit book in accordance with the transfer order (the AIB Transfer Order) issued by the Irish High Court on 24 February 2011 under powers granted by the Credit Institutions (Stabilisation) Act 2010 (CISA), funding support from central banks and monetary authorities has increased significantly as a percentage of total funding. The approved Restructuring Plan, which was prepared in conjunction with the National Treasury Management Agency ('NTMA') and the Department of Finance, provides for the resolution and work out of the Banks loan book over a period of up to ten years. One of the main aims of the Restructuring Plan is to gradually reduce the Banks liquidity and funding requirements over time by deleveraging the Bank on a phased basis while at the same time minimising capital losses. The Restructuring Plan also contains details of key assumptions and dependencies, including the Banks continued reliance on Central Bank or similar funding. On the basis that the EC has approved all aid measures granted to the Bank, the Directors are satisfied that there is no reason to believe that such facilities will not continue to be available for the foreseeable future. 1.2 Adoption of new accounting standards The following standards and amendments to standards, which apply to the Group, have been adopted during the period ended 30 June 2011: Amendment to IAS 34 - Interim Financial Reporting The amendment to IAS 34 provides guidance to illustrate how to apply disclosure principles in IAS 34 and adds disclosure requirements around the circumstances likely to affect fair values of financial instruments and their classification, transfers of financial instruments between different levels of the fair value hierarchy, changes in classification of financial assets and changes in contingent liabilities and assets. Amendment to IAS 24 - Related Party Transactions The main changes to IAS 24 include a partial exemption from the disclosure requirements for transactions between a government-controlled reporting entity and that government or other entities controlled by that government, and amendments to the definition of a related party. A number of other amendments and interpretations to IFRS have been published that first apply from 1 January 2011. These have not resulted in any material changes to the Group's accounting policies.
31
Notes to the interim financial statements continued
1.
Basis of preparation continued

1.3 Prospective accounting changes A number of accounting developments which will apply in future years are described in the 2010 Annual Report and Accounts. The most significant is IFRS 9 - Financial Instruments: Classification and Measurement. In August 2011 the International Accounting Standards Board ('IASB') issued an exposure draft to delay the effective date of this standard to accounting periods beginning on or after 1 January 2015. The original effective date was for periods beginning on or after 1 January 2013. The Group has not yet fully assessed the potential impact of this standard. It is the first phase of a project to replace IAS 39 Financial Instruments: Recognition and Measurement. Its aim is to reduce the complexity of accounting for financial assets and liabilities and in so doing to aid investors and other users understanding of financial information. IFRS 9 uses a single approach to determine whether a financial asset or liability is measured at amortised cost or fair value, replacing the many different rules in IAS 39. New requirements in respect of the derecognition of financial instruments, impairment and hedge accounting are expected to be added to IFRS 9 in late 2011. In addition, in May 2011 the IASB issued IFRS 10 - Consolidated Financial Statements, IFRS 11 - Joint Arrangements, IFRS 12 Disclosures of Interests in Other Entities, IFRS 13 - Fair Value Measurement, and revised versions of IAS 27 - Separate Financial Statements and IAS 28 - Investments in Associates and Joint Ventures. Each of these standards is effective for accounting periods beginning on or after 1 January 2013. The Group is currently evaluating the potential impact of the adoption of these standards. 1.4 Significant accounting estimates and judgements The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. The judgements and estimates involved in the Group's accounting policies that are considered by the Board to be the most important to the portrayal of the Group's financial condition are summarised in note 1 to the 2010 Annual Report and Accounts. The use of estimates, assumptions or models that differ from those adopted by the Group could affect its reported results. The most significant estimates and judgements applicable to the current period are as follows: Loan impairment The estimation of potential loan losses is inherently uncertain and dependent upon many factors. On an ongoing basis potential issues are identified as a result of individual loans being regularly monitored. The Group also performs, semi-annually, a formal bottom up review of its loan portfolios. This loan monitoring and review process determines whether there is any objective evidence of incurred impairment. Impairment under IFRS is only recognised in respect of incurred losses. Future potential losses cannot be provided for. If there is objective evidence that a loan is currently impaired, a provision is recognised equating to the amount by which the carrying value of the loan exceeds the present value of its expected future cash flows. Provisions are calculated on an individual basis with reference to expected future cash flows including those arising from the realisation of collateral. The determination of these provisions requires the exercise of considerable subjective judgement by management involving matters such as future economic conditions, trading performance of client businesses and the valuation of underlying collateral held. Provision calculations are highly sensitive to the underlying assumptions made in relation to the amount and timing of future cash flows, including the sale of assets held as collateral. The Groups assessment in cases where it plans to continue to support the borrower is primarily based on the strategy and business model of the client, and these may make assumptions in relation to a return to more normalised property market conditions and higher asset values over time. The majority of the Groups collateral consists of property assets. The values of these assets have declined significantly as a result of the economic downturn. In the current market, where there is limited transactional activity, there may be a wide range of valuation estimates. Changes in estimated realisable collateral values and the timing of their realisation could have a material effect on the amount of impairment provisions reflected in the income statement and the closing provisions in the statement of financial position. The Group has evaluated the impact on its specific impairment charge, for both loans and advances to customers and loans classified as held for sale, of applying a lower estimate of the realisable value of collateral and of a change in the timing of the realisation of these assets. The Bank estimates that a decrease of 10% in realisable collateral values on currently impaired loans would have increased the impairment charge for the period by approximately 0.8bn. Similarly, an extension of one year in the timing of the realisation of these assets would have increased the impairment charge by approximately 0.2bn. These estimates are based on impaired loans at 30 June 2011. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly. An additional incurred but not reported ('IBNR') collective provision is required to cover losses inherent in the loan book where there is objective evidence to suggest that it contains impaired loans, but the individual impaired loans cannot yet be identified. This provision takes account of observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of loans with similar credit risk characteristics, although the decrease cannot yet be identified within the individual loans in the group.
32
1.4 Significant accounting estimates and judgements continued Loan impairment continued This provision is calculated by applying incurred loss factors to groups of loans sharing common risk characteristics. Loss factors are determined by historical loan loss experience as adjusted for current observable market data. Adjustments reflect the impact of current conditions that did not affect the years on which the historical loss experience is based and remove the effects of conditions in the historical period that do not exist currently. The provision amount is also adjusted to reflect the appropriate loss emergence period. The loss emergence period represents the time it takes following a specific loss event on an individual loan for that loan to be identified as impaired. The loss emergence period applied in the period was six months (31 December 2010: six months). The future credit quality of loan portfolios against which an IBNR collective provision is applied is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include factors such as local and international economic conditions, borrower specific factors, industry trends, interest rates, unemployment levels and other external factors. For loan impairment details, see note 24. Assets classified as held for sale Assets that the Bank believes will be transferred to the National Asset Management Agency ('NAMA') are classified as held for sale in the statement of financial position. The Bank has no control over the quantity of eligible assets that NAMA will acquire or over the valuation NAMA will place on those assets. NAMA has not confirmed to the Bank the total value of eligible assets it expects to purchase or the final consideration it will pay in respect of those assets. Held for sale assets also include the Bank's US loan book and certain other US assets expected to be sold to third parties. Loan and derivative assets continue to be measured on the same basis as prior to their reclassification as held for sale. Other non-financial assets classified as held for sale are stated at the lower of their carrying amount and fair value less costs to sell. Assets will continue to be carried in the statement of financial position until they legally transfer. The amount of consideration received will be measured at fair value and any difference between the carrying value of the asset on the date of disposal and the consideration received will be recognised in the income statement. Fair value Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable and willing parties in an arm's length transaction. Fair values are determined by reference to observable market prices where these are available and are reliable. Where representative market prices are not available or are unreliable, fair values are determined by using valuation techniques which refer to observable market data. These include prices obtained from independent third party pricing service providers, comparisons with similar financial instruments for which observable market prices exist, discounted cash flow analyses, option pricing models and other valuation techniques commonly used by market participants. Where non-observable market data is used in valuations, any resulting difference between the transaction price and the valuation is deferred. The deferred day one profit or loss is either amortised over the life of the transaction, deferred until the instruments fair value can be determined using market observable inputs or realised through settlement, depending on the nature of the instrument and availability of market observable inputs. The accuracy of fair value calculations could be affected by unexpected market movements when compared to actual outcomes. Due to the increasing significance of credit related factors, determining the fair value of corporate interest rate derivative financial assets requires considerable judgement. In the absence of unadjusted quoted market prices, valuation techniques take into consideration the credit quality of the underlying loans when determining fair value. 1.5 Segmental reporting The Restructuring Plan approved by the EC on 29 June 2011 provides for the orderly resolution of the Bank following its amalgamation with INBS over a period of up to ten years. In conjunction with EC approval, several commitments have been given by the Bank, including commitments not to develop any new activities and to only carry out activities consistent with managing the work-out of the remaining loan book. Since nationalisation in January 2009 the management and structure of the Bank have changed dramatically. New managements primary business focus is the implementation of the work-out process consistent with the Irish Governments stated deleveraging objectives, the Restructuring Plan and the orders and requirements issued in respect of both the Bank and INBS under CISA. The Banks single business activity has become the orderly resolution of the Group, in a manner consistent with the Restructuring Plan and requirements and orders made in respect of the Bank under Section 50 of CISA consistent with that Restructuring Plan, over the allotted time frame of up to ten years. As a result, performance is assessed on a total Group basis as a single continuing business activity. Statutory financial information is therefore presented as one operating segment and actions taken to achieve the Banks strategic objective, including the sale or transfer of assets and liabilities, are regarded as arising from a continuing activity.
33
2.
Net interest income
6 months ended 30 June 2011 m 12 439 19 644 75 1,189
6 months ended 30 June 2010 m 25 899 67 94 10 1 1,096 2 1,098
Year ended 31 December 2010 m 49 1,567 104 433 146 2 2,301 3 2,304
Interest and similar income Interest on loans and advances to banks Interest on loans and advances to customers (including loans classified as held for sale) Interest on available-for-sale financial assets Interest on promissory note Interest on Government debt securities at amortised cost Finance leasing and hire purchase income Interest on financial assets at fair value through profit or loss held on own account
1,189
Interest expense and similar charges Interest on deposits from banks Interest on customer accounts Interest on debt securities in issue Interest on subordinated liabilities and other capital instruments (563) (64) (95) 5 (717) Net interest income 472 (251) (342) (140) (13) (746) 352 (646) (631) (260) (25) (1,562) 742
Group net interest income has increased by 120m or 34% versus the 6 months ending 30 June 2010. The increase in net interest income is primarily driven by income earned on the promissory note, offset somewhat by the cost associated with Central Bank of Ireland special funding facilities. Interest income on customer lending includes margin interest and arrangement fees amortised over the expected lives of the related loans. Interest on loans and advances to customers includes interest income on held for sale loans which, at 30 June 2011, represent 24% (30 June 2010: 41%; 31 December 2010: 6%) of total customer loan balances. Included within net interest income is 102m (30 June 2010: 254m; 31 December 2010: 413m) in respect of impaired customer loan balances. Specific impairment on individual loans is calculated based on the difference between the current loan balance and the discounted value of estimated future cash flows on the loan. The impact of the unwinding of this discount, as the time to the realisation of the estimated future cash flows shortens, is recognised as interest income in accordance with IFRS. Interest and similar income includes net foreign exchange losses of 2m (30 June 2010: 33m; 31 December 2010: 59m). Interest on deposits from banks includes 519m (30 June 2010: 153m; 31 December 2010: 435m) in respect of amounts borrowed under a Special Master Repurchase Agreement, a Master Loan Repurchase Agreement and a Facility Deed agreement from the Central Bank of Ireland (note 25). The interest rates on these facilities are set by the Central Bank of Ireland and advised at each rollover, and are currently linked to the European Central Bank marginal lending facility rate. Interest expense on subordinated liabilities and other capital instruments for the period includes a combined interest accrual release of 6m on the Stg200m Step-up Callable Perpetual Capital Securities and the Stg250m Tier One Non-Innovative Capital Securities as income during the period when the call right on these securities was exercised by the bank with no accrued interest being paid. Included within interest expense for the period is 50m (30 June 2010: 38m; 31 December 2010: 128m) relating to the cost of the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (the 'ELG Scheme'), in which the Bank became a participating institution on 28 January 2010. The cost of this scheme is classified as interest expense as it is directly attributable and incremental to the issuance of specific financial liabilities. The Minister for Finance has extended the ELG Scheme for certain eligible liabilities to 31 December 2011.
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3.
Fee and commission income and expense
6 months ended 30 June 2011 m 11 4 3 15 33
6 months ended 30 June 2010 m 11 5 4 3 23 (41)
Year ended 31 December 2010 m 18 11 8 10 47 (58)
Fee and commission income Corporate treasury commissions Asset management and related fees Financial guarantee fees Trust and other fiduciary fees Other fees
Fee and commission expense
(2)
Fees which are an integral part of the effective interest rate of a financial instrument are included in net interest income. Corporate treasury commissions include commission earned on the sale of interest rate derivatives, of which there has been minimal activity for the period. 9m of deferred income was released to the income statement during the period relating to corporate swaps that have matured or that were terminated. Asset management and related fees are earned for the sourcing, structuring and on-going management of investments on behalf of clients. The continuing decline in these fees reflects a decrease in the value of assets under management and the fact that there is no new client investment activity. Other fees include 11m (30 June 2010: 1m; 31 December 2010: 7m) due from NAMA in relation to management fees. Fee and commission expense in prior periods included amounts due in respect of the Credit Institutions (Financial Support) ('CIFS') Scheme 2008 (30 June 2010: 39m; 31 December 2010: 54m). The CIFS scheme expired on 29 September 2010.
4.
Net trading (expense)/income
6 months ended 30 June 2011 m 24 (40) (1) (17)
6 months ended 30 June 2010 m (42) 42 1 1
Year ended 31 December 2010 m (29) (13) 1 (41)
Interest rate contracts Foreign exchange contracts Credit contracts Hedge ineffectiveness
The Banks net trading line has benefited by 24m (30 June 2010: charge of 31m; 31 December 2010: charge of 27m) following a reduction in the value of corporate credit exposures and related credit charges on interest rate contracts. Foreign exchange contracts include a net loss of 49m (30 June 2010: net gain of 70m; 31 December 2010: net gain of 18m) as a result of the Group's capital management and net investment hedging strategies and a gain of 2m (30 June 2010: loss of 33m; 31 December 2010: loss of 33m) in relation to the close out of structural foreign exchange positions.
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5.
Financial assets designated at fair value
6 months ended 30 June 2011 m
Year ended 31 December 2010 m
Net change in value of financial assets designated at fair value through profit or loss held on own account
(23)
(23)
The charge in the prior periods primarily relates to negative fair value movements on equity shares resulting from challenging business conditions facing the entities in which the shares are held.
6.
Gain on liability management exercise
Gains on repurchases/restructurings under the Group's liability management exercise ('LME')
1,589
During the prior year the Group repurchased or restructured certain subordinated liabilities as part of its ongoing capital management activities. 270m nominal of Tier 1, 45m of Upper Tier 2 and 1,575m of Lower Tier 2 securities were repurchased, exchanged or restructured (note 30). The net LME gain of 1,589m resulted from consideration and fees paid of 309m extinguishing securities with a carrying value of 1,898m. The gain included costs and fees incurred as part of the liability management exercise.
7.
Other operating income/(expense)
(Decrease)/increase in value of assets designated at fair value held in respect of liabilities to customers under investment contracts Decrease/(increase) in value of liabilities designated at fair value held in respect of liabilities to customers under investment contracts Net losses on disposal of available-for-sale financial assets Rental income Other
(7) 7 (1) 4 3
(5) 5 (30) 4 (2) (28)
46 (46) (110) 10 (4) (104)
The decrease in the value of assets held in respect of liabilities to customers under investment contracts is primarily attributable to foreign exchange movements on UK property investments. The increase in the year ended 31 December 2010 was primarily due to increases in UK property values. The Group recognised losses of 1m (30 June 2010: 85m; 31 December 2010: 165m) on the disposal of asset backed securities and investments in bank subordinated debt during the period. The prior period losses were partially offset by gains of 55m on the sale of 1.5bn of government bonds. Other includes the net amount of operating income and expenses relating to the Groups investment properties held on own account. Included in the net amount are payroll and related expenses of 5m (30 June 2010: 5m; 31 December 2010: 10m) in respect of 278 (30 June 2010: 261; 31 December 2010: 275) staff who are directly employed in the running of a US hotel, which is classified as a held for sale investment property, and which is independently managed by an international hotel management group.
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8.
Administrative expenses
6 months ended 30 June 2011 m Staff costs: Wages and salaries Retirement benefits cost - defined contribution plans Retirement benefits cost - defined benefit plans Social welfare costs Other staff costs Other administrative costs Exceptional costs 43 6 4 3 56 60 29 145 50 5 1 5 6 67 40 14 121 97 12 1 10 10 130 108 89 327 6 months ended 30 June 2010 m Year ended 31 December 2010 m
The decrease in wages and salaries and related social welfare costs reflects a fall in average staff numbers from 1,360 during the period ended 30 June 2010 to 1,134 during the current period primarily due to the transfer of staff to Allied Irish Banks, p.l.c. ('AIB'), and its UK subsidiary, AIB Group (UK) p.l.c. ('AIB UK'), under the AIB Transfer Order, and the transfer of the Bank's Isle of Man subsidiary to AIB at the same time. Other administrative costs have increased over the corresponding prior period due to significantly higher loan book asset quality related professional fees and additional fees for other ongoing reviews. Exceptional costs of 29m incurred during the period primarily relate to professional fees associated with the Banks restructuring, the NAMA process and ongoing reviews into legacy matters.
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9.
Retirement benefits
The parent Bank operates two defined benefit non-contributory pension schemes in Ireland. The assets of these schemes are held in separate trustee-administered funds. These schemes have been closed to new members since January 1994. New Irish employees after that date join a funded scheme on a defined contribution basis. There are also funded defined contribution pension plans covering eligible Group employees in other locations. Defined benefit pension schemes 30 June 2011 m Fair value of scheme assets Funded defined benefit obligation (Deficit)/surplus within funded schemes 83 (86) (3) 31 December 2010 m 94 (93) 1 30 June 2010 m 100 (109) (9)
The deficit in the Group's funded defined benefit pension schemes, measured in accordance with IAS 19, is 3m (31 December 2010: surplus of 1m; 30 June 2010: deficit of 9m). Financial assumptions The principal assumptions used, which are based on the advice of an independent actuary, are as follows: 6 months ended 30 June 2011 % p.a. Discount rate for liabilities of the schemes Rate of increase in pensions Inflation rate Amount recognised in other comprehensive income 6 months ended 30 June 2011 m Change in assumptions underlying the present value of schemes' liabilities Experience gains on liabilities of the pension schemes Actual return less expected return on assets of the pension schemes Actuarial losses recognised under IAS 19 Deferred tax on actuarial losses Actuarial losses after tax 6 months ended 30 June 2010 m Year ended 31 December 2010 m 5.75 2.50 to 3.00 2.50 6 months ended 30 June 2010 % p.a. 5.10 2.00 to 3.00 2.00 Year ended 31 December 2010 % p.a. 5.50 2.00 to 3.00 2.00
(1) (4) (5) (5)
(17) 2 (1) (16) (16)
(10) 4 (1) (7) (7)
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10. Loss on transfer of assets and liabilities
6 months ended 30 June 2011 m 3,719 (3,933) (214)
6 months ended 30 June 2010 m -
Year ended 31 December 2010 m -
Net consideration received Net carrying value of assets and liabilities transferred Total loss on transfer
On 24 February 2011, under powers granted by CISA, the Minister for Finance, in consultation with the Governor of the Central Bank of Ireland, announced the immediate transfer by way of the AIB Transfer Order (note 1) of the majority of the Bank's Irish and UK deposits and 12.2bn nominal of NAMA senior bonds at a price of 98.5% from the Bank (i) to AIB in the case of the Irish deposits and NAMA senior bonds, and (ii) to its UK subsidiary, AIB UK in the case of the UK deposits. The Bank's shares in its Isle of Man subsidiary, Anglo Irish Bank Corporation (International) PLC, were also transferred to AIB at the same time at approximately net asset value. In return for transferring its Irish and UK deposits the Bank was required to pay the AIB Group 1.6bn in excess of book value. The AIB Transfer Order followed on from the direction order made by the Irish High Court on 8 February 2011 under Section 9 of CISA (the 'Direction Order'), which directed the Bank to begin an auction process, operated by the NTMA, to transfer deposits and certain assets held by the Bank to a third-party financial institution or institutions. A Transfer Support Agreement (TSA) was concluded between the Bank, AIB and AIB UK at the time of the AIB Transfer Order. Under the terms of the TSA, the Bank provided AIB and AIB UK with an indemnity, subject to certain exclusions from liability, in respect of certain direct liabilities which could arise in connection with the deposits, assets or entity which transferred. The TSA also defined the services to be provided by the Bank to AIB and AIB UK, and by AIB and AIB UK to the Bank, until the migration of the transferred deposits and staff from the Bank's systems and premises is complete. The services are wideranging and include business, infrastructure and administrative support. The service levels applicable to the relevant services are designed to ensure that the transferred assets and liabilities will be maintained to the same level of service as they had been maintained by the Bank, or its third party service providers, in the twelve months prior to the date of transfer. As the terms of the TSA were, by necessity due to the short time-frame between the identification of the transferee and the time of the AIB Transfer Order, quite high-level, the TSA provided for a more detailed transitional services agreement to be entered into between the parties post-Transfer Order. This took place on 1 July 2011.
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11. Loss on disposal of assets to NAMA
6 months ended 30 June 2011 m 264 55 319 282 601
6 months ended 30 June 2010 m 4,177 (7,645) (3,468) (3,468)
Year ended 31 December 2010 m 10,728 (21,924) (11,196) (351) (11,547)
Fair value of consideration received Carrying value of assets transferred from/(to) NAMA Other transfer adjustments and provision for servicing liability Loss on disposal of assets to NAMA
In the current period the Bank has recognised a net reduction of 601m in the overall reported loss on disposal of assets to NAMA. The reduction in the loss on disposal primarily results from both settled and expected positive valuation adjustments relating to the completion of due diligence on loans transferred during November and December 2010. During November and December 2010 the Bank transferred 17.5bn of loans without full due diligence having been completed. These assets were transferred at an average discount of 64%. In the six months ended 30 June 2011 the Bank received nominal consideration of 284m, 95% in the form of NAMA senior floating rate notes (note 23) and 5% in the form of NAMA subordinated notes (note 21), representing the net amount owing to the Bank following the completion of due diligence on 5.5bn of loans, the settlement of certain valuation adjustments and repayments to NAMA of consideration previously received in respect of a small number of ineligible loan assets that were transferred back to the Bank. The final overall loss on disposal will only be determined when full due diligence has been completed by NAMA on all assets transferred. However, on the basis of work completed to date in connection with loan collateral valuations, and based on preliminary engagement with NAMA, the Bank has also recognised an asset of 262m at 30 June 2011. This asset, which involves estimations and assumptions, represents the anticipated value of further net positive valuation adjustments yet to be received.
12. Loss on disposal of other financial assets
6 months ended 30 June 2011 m 512 (552) (40)
6 months ended 30 June 2010 m -
Year ended 31 December 2010 m -
Consideration received Carrying value of assets sold Total loss on disposal
During the period the Bank sold certain UK, US and Irish loans with a gross value of 913m (before provisions for impairment of 367m), and related derivatives with a fair value on date of disposal of 6m (net of credit fair value adjustments of 1m). Certain of these loans were classified as held for sale at 31 December 2010.
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13. Provisions for impairment and other provisions
6 months ended 30 June 2011 m 903 (209) 694
6 months ended 30 June 2010 m 2,492 27 2,519
Year ended 31 December 2010 m 4,956 21 4,977
Loans and advances to customers (note 24) Specific Collective
Loans classified as held for sale (note 19) Specific Debt securities - available-for-sale ('AFS') financial assets Investment property - held on own account Financial guarantee contracts and other provisions 36 48 2,280 10 44 2,683 11 61 35
Total provisions
778
4,853
7,767
The total specific lending impairment charge for the period of 939m (30 June 2010: 4,772m; 31 December 2010: 7,639m) reflects the continuing difficult operating environment across all of the Banks core markets during the period. Ireland, where property market conditions continue to be stressed, represents 773m (30 June 2010: 3,755m; 31 December 2010: 5,813m) of the total charge. The remainder comprises 143m (30 June 2010: 459m; 31 December 2010: 737m) in respect of the UK and 23m (30 June 2010: 558m; 31 December 2010: 1,089m) in respect of North America. Of the specific charge, 26m relates to loans of 1,229m which at 30 June 2011 were expected to transfer to NAMA, with the balance of 913mattributable to the non-NAMA portfolio. The collective provision is applied to portfolios of customer loans for which there is no evidence of specific impairment. It has been calculated with reference to historical loss experience supplemented by observable market evidence and management's judgement regarding current market conditions. The reduction in collective provisions of 209m in the current period is primarily due to a decrease of 18% in the performing loan portfolio, including loans classified as held for sale, and the recognition of specific provisions on smaller relationships not previously individually assessed for impairment. Additional information in relation to the lending impairment charge for the year is provided in the Business review. Financial guarantee contracts and other provisions in the current period includes an additional charge of 22m (30 June 2010: nil; 31 December 2010: 45m) relating to an internal review of historical interest rate setting procedures as applied to certain loan accounts (note 29).
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14. Taxation
6 months ended 30 June 2011 m 6 (2) 4
6 months ended 30 June 2010 m 12 (12) -
Year ended 31 December 2010 m 30 2 32
Current taxation charge Deferred taxation (credit)/charge
No Irish corporation tax will be payable on the Group's Irish business activities due to the availability of losses in the Bank taking into account projected full year results to 31 December 2011 which are offset against profits within the Group. However a current period foreign tax charge of 6m arises. A deferred tax credit of 2m has been recognised to the extent that it is probable that any potential additional chargeable profits can be offset by current period losses.
15. Cash and balances with central banks
30 June 2011 m 255
31 December 2010 m 181
30 June 2010 m 79
Cash and balances with central banks
These amounts include only those balances with central banks which may be withdrawn without notice. Cash and balances with central banks primarily relate to the Banks minimum reserve requirement held with the Central Bank of Ireland. Irish credit institutions must maintain a minimum reserve requirement over a specified maintenance period. Balances can be withdrawn as long as the requirement is met on average over this maintenance period. As a result, period end balances do not necessarily indicate the level of this minimum requirement.
16. Financial assets at fair value through profit or loss - held on own account
Debt securities Equity shares
30 June 2011 m 13 13
31 December 2010 m 13 13
30 June 2010 m 61 18 79
All of the above financial assets are designated at fair value through profit or loss. Debt securities which contain embedded derivatives were designated at fair value through profit or loss at inception in accordance with IFRS. As part of the strategy to de-risk the Bank, all debt securities held on own account with value have either been sold or have matured during the prior period.
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17. Derivative financial instruments

With the exception of designated hedging derivatives, as defined by IAS 39, derivatives are treated as held for trading. The held for trading classification comprises corporate sales derivatives, economic hedges which do not meet the strict qualifying criteria for hedge accounting, and derivatives managed in conjunction with financial instruments designated at fair value. The Bank only enters into new derivative transactions for the purposes of balance sheet risk management. The notional amount of a derivative contract does not necessarily represent the Group's real exposure to credit risk, which is limited to the current replacement cost of contracts with a positive fair value to the Group should the counterparty default. To reduce credit risk on interbank derivatives, the Group uses a variety of credit enhancement techniques such as master netting agreements and collateral support agreements ('CSAs'), where cash security is provided against the exposure. Derivatives are carried at fair value and shown in the statement of financial position as separate totals of assets and liabilities. Details of the objectives, policies and strategies arising from the Group's use of financial instruments, including derivative financial instruments, are presented in note 51 to the Group's Annual Report and Accounts 2010. The following tables present the notional and fair value amounts of derivative financial instruments, analysed by product and category. 30 June 2011 Contract notional amount m Derivatives held for trading Interest rate contracts Foreign exchange contracts Equity index options - held and written Total trading derivatives Derivatives held for hedging Fair value hedges Cash flow hedges Total hedging derivatives Derivatives held in respect of liabilities to customers under investment contracts (note 28) Total derivative financial instruments 5,243 242 5,485 120 3 123 (15) (15) 7,120 1,887 9,007 82 10 92 (60) (60) 73,251 13,787 194 87,232 1,273 481 11 1,765 (1,728) (16) (7) (1,751) 103,930 15,016 234 119,180 1,665 168 11 1,844 (2,211) (98) (7) (2,316) Fair values Assets Liabilities m m 31 December 2010 Contract notional amount m Fair values Assets Liabilities m m
1,067 93,784
1,888
(62) (1,828)
1,075 129,262
1,936
(84) (2,460)
Positive movements in the fair value of foreign exchange contracts is largely due to the appreciation during the period of the euro against both sterling and US dollar. In the normal course of business the Group utilises forward foreign exchange contracts and cross currency swaps to manage currency mismatches that may arise. In March and April 2011 the Bank entered into two cross currency swaps with the NTMA on market terms. The principal amounts of the swaps are 2.3bn / $3.2bn and 0.6bn / 0.6bn respectively and these amounts were exchanged between the parties. The swaps have an amortising profile and contractual maturity of 2021. The interest rates on the swaps are marketbased plus an agreed spread over the respective currency interbank benchmark rate. The majority of the Banks derivative transactions with interbank counterparties are covered under CSAs, with cash collateral exchanged on a daily basis (note 18). In the period to 30 June 2011 the Group transferred income of 15m (30 June 2010: 55m; 31 December 2010: 85m) from the cash flow hedging reserve to net interest income. There are no forecast transactions for which hedge accounting had previously been used, but that are now no longer expected to occur. Derivative financial instruments include corporate hedging transactions involving the Banks lending clients. It is probable that certain of these transactions relating to US clients will be included in the intended sale of the US loan book.
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18. Loans and advances to banks
30 June 2011 m 2,030 2,030
31 December 2010 m 3,038 487 3,525
30 June 2010 m 4,594 3,438 8,032
Placements with banks Securities purchased with agreements to resell
A credit ratings profile of loans and advances to banks is as follows: 30 June 2011 m AAA / AA A BBB+ / BBB / BBBTotal held on own account Policyholders' assets (note 28) 422 1,476 123 2,021 9 2,030 31 December 2010 m 300 2,815 397 3,512 13 3,525 30 June 2010 m 2,360 3,492 2,175 8,027 5 8,032
The ratings above are counterparty ratings and do not reflect the existence of government guarantees, where applicable, or the credit risk mitigation provided by collateral received under reverse repurchase agreements. Loans and advances to banks include short term placements of 0.1bn (31 December 2010: 0.4bn; 30 June 2010: 2.4bn) with entities covered under the ELG Scheme. Placements with banks include 1.6bn (31 December 2010: 1.8bn; 30 June 2010: 2.9bn) of cash collateral placed with counterparties to offset credit risk arising from derivative contracts and 0.1bn (31 December 2010: 0.1bn; 30 June 2010: 0.1bn) held with central banks which cannot be withdrawn on demand.
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19. Assets classified as held for sale
30 June 2011 m 1,229 (209) 1,020 6 1,026 6,657 (1,017) 5,640 156 6,822
31 December 2010 m 1,113 (148) 965 17 982 1,075 (417) 658 1,640
30 June 2010 m 25,858 (9,738) 16,120 320 16,440 715 (269) 446 16,886
Loans classified as held for sale to NAMA Less: provisions for impairment Derivative financial instruments NAMA assets held for sale Other loans classified as held for sale Less: provisions for impairment Other loans held for sale Investment property Total assets classified as held for sale
Assets classified as held for sale comprise those loans which have been identified for transfer to NAMA, including related derivatives, together with the entire US loan book which is currently being actively marketed for sale. In total, at 30 June 2011, 6,660m (31 December 2010: 1,623m; 30 June 2010: 16,566m) of customer loans, net of associated provisions of 1,226m (31 December 2010: 565m; 30 June 2010: 10,007m), were anticipated to be transferred to NAMA or sold to third parties. The derivative financial instruments balance of 6m (31 December 2010: 17m; 30 June 2010: 320m) represents the fair value of interest rate contracts linked to NAMA eligible assets at 30 June 2011. The total notional amount of these contracts is 184m (31 December 2010: 537m; 30 June 2010: 7,270m) and the transactions consist primarily of interest rate swap agreements. NAMA has complete discretion as to which assets will be acquired and has not confirmed to the Bank the total value of loans that it expects to purchase. In July 2011 NAMA informed the Bank that it will not be acquiring 0.9bn of loans which were classified as held for sale at 30 June 2011. At 30 June 2011 investment property assets with a net book value of 156m were reclassified as held for sale. These assets, which consist primarily of properties that were originally acquired by the Groups Private Banking and Lending businesses but were not allocated to policyholders under investment contracts or sold to private clients, are now anticipated to be sold to third parties. Specific provisions for impairment on loans classified as held for sale 30 June 2011 m 565 36 (232) (4) (28) 28 886 (25) 1,226 3,367 31 December 2010 m 10,120 2,683 (19) (245) 69 (185) (11,858) 565 979 30 June 2010 m 10,120 2,280 (182) 256 (6) (2,461) 10,007 20,574
At beginning of period Charge against profits - specific (note 13) Write-offs Unwind of discount Exchange movements Provisions on loans received back from NAMA Net transfers from/(to) loans and advances to customers (note 24) Release on disposal of assets to NAMA At end of period Impaired loans classified as held for sale
Write-offs in the current period include the release of provisions on the disposal of loans sold to third parties. An analysis of lending assets by internal credit quality category, geographical location and industry sector concentration is provided in note 37.
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20. Amount due from Shareholder
30 June 2011 m -
31 December 2010 m -
30 June 2010 m 8,580
Amount due from Shareholder
The amount due from Shareholder at 30 June 2010 represented the receivable due from the Minister for Finance, as the Bank's sole shareholder and having the statutory power to provide financial support to the Bank under the Credit Institutions (Financial Support) Act 2008, following his commitment in his letter of 30 June 2010 to ensure the Bank had sufficient capital to meet its regulatory capital requirements. On 23 August 2010 the Minister fulfilled his commitment by issuing an adjustment instrument to the original promissory note received.
21. Available-for-sale financial assets
30 June 2011 m 321 985 6 198 1,510
31 December 2010 m 397 1,650 5 167 2,219
30 June 2010 m 706 3,015 583 276 42 4,622
Government bonds Financial institution bonds Residential mortgage backed securities Asset backed securities NAMA subordinated bonds
The movement on available-for-sale ('AFS') financial assets is summarised below: 6 months ended 30 June 2011 m At beginning of period Additions Disposals (sales and maturities) Fair value movements Decrease in interest accruals Exchange and other movements At end of period 2,219 12 (718) 16 (10) (9) 1,510 Year ended 31 December 2010 m 7,890 993 (6,571) (107) (70) 84 2,219 6 months ended 30 June 2010 m 7,890 661 (3,950) (50) (37) 108 4,622
The AFS portfolio comprises sovereign investments, debt issued by financial institutions and NAMA subordinated bonds. AFS bonds are marked to market using independent prices obtained from external pricing sources. NAMA subordinated bonds are valued using standard discounted cash flow techniques. The Bank does not use models to value other AFS securities and does not adjust any external prices obtained. The NAMA subordinated bonds will be redeemed in full at par without undeclared interest subject to the financial performance of NAMA in totality. NAMA may call the bonds on any interest payment date. On each interest payment date commencing on 1 March 2011, and annually thereafter, NAMA may declare the interest payable if it deems it appropriate to do so if it is achieving its objectives. Interest not declared in any year will not accumulate. No interest was declared by NAMA on 1 March 2011. Additions in the current period include the receipt of NAMA subordinated bonds with an initial fair value of 5m. Disposals and maturities include 0.6bn of financial institution bonds and 0.1bn of government securities. In addition, NAMA subordinated bonds with a carrying value of 2m were returned to NAMA during the period. The amount removed from equity and recognised as a loss in profit or loss in respect of the disposal of available-for-sale financial assets amounted to 1m (31 December 2010: 110m; 30 June 2010: 30m). At 30 June 2011 AFS financial assets of 1,232m (31 December 2010: 1,757m; 30 June 2010: 3,409m) were used in sale and repurchase agreements with third parties for periods not exceeding six months.
46
The AFS portfolio comprises investments in debt securities issued in Ireland of 0.9bn (31 December 2010: 1.0bn), in the Rest of Europe of 0.6bn (31 December 2010: 1.1bn) and in the Rest of the World of nil (31 December 2010: 0.1bn). The external ratings profile of the Group's AFS financial assets, excluding equity shares, is as follows: 30 June 2011 Financial Institutions m 166 289 451 79 985 Residential Mortgage Securities m Asset NAMA Backed Subordinated Securities Bonds m m 6 6 198 198
Sovereign m AAA / AA A BBB+ / BBB / BBBSub investment grade Unrated 46 275 321
Total m 212 289 726 79 204 1,510
31 December 2010 Financial Institutions m 418 683 549 1,650 Residential Mortgage Securities m Asset Backed Securities m 5 5 NAMA Subordinated Bonds m 167 167
Sovereign m AAA / AA A BBB+ / BBB / BBBSub investment grade Unrated 119 278 397
Total m 537 683 827 172 2,219
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22. Promissory note
30 June 2011 m 23,804
31 December 2010 m 25,704
30 June 2010 m 10,407
Promissory note
The Minister for Finance has provided the Bank with a promissory note to the value of 25.3bn comprising four tranches. Each tranche pays a market based fixed rate of interest which is set on the date of issue and is appropriate to the maturity date of the tranche. The promissory note pays 10% of the initial principal amount of each tranche annually. The Bank received the first instalment payment of 2.53bn on 31 March 2011. This pay down resulted in the promissory note having a revised principal amount of 23.6bn from 31 March 2011. In December 2010, at the request of the Minister for Finance, a change was made to the legal terms of the promissory note allowing for an interest holiday in 2011 and 2012, with a higher notional interest rate thereafter. This interest holiday does not impact the accounting for the promissory note as the cash flows and effective interest rate of the note were unchanged. Hence the Bank will continue to accrue interest income on the note in 2011 and 2012. The fixed cash flows of the instrument create an interest rate risk for the Group. As at 30 June 2011, the Bank had hedged a total of 4.3bn of the nominal amount using interest rate swaps. A further 5.7bn of economic hedges exist in the form of the Groups capital and fixed rate debt issuance. The promissory note is currently pledged as collateral for funding under a Special Master Repurchase Agreement with the Central Bank of Ireland. The note, which is classified as loans and receivables, is initially recognised at fair value and subsequently carried at amortised cost. IFRS defines loans and receivables as financial assets with fixed or determinable payments that are not quoted in an active market.
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23. Government debt securities at amortised cost
30 June 2011 m 259
31 December 2010 m 10,623
30 June 2010 m 4,061
NAMA Government Guaranteed Floating Rate Notes
95% of the consideration received for assets that transfer to NAMA is in the form of Government Guaranteed Floating Rate Notes ('senior notes'). The senior notes are classified as loans and receivables, and are initially recognised at fair value. At 31 December 2010 the Bank held senior notes with a total nominal value of 12,275m. These notes accrued interest at 6 month Euribor, receivable semi annually on 1 March and 1 September, and had a maturity date of March 2011 but were extendible annually at maturity at the option of NAMA. In early February 2011, following valuation adjustments on loans transferred to NAMA in 2010, the Bank transferred 91m nominal of senior notes back to NAMA. On 24 February 2011, pursuant to the AIB Transfer Order and CISA, the Bank's remaining holding of senior notes of 12,184m was transferred to AIB (note 10). The carrying value of these notes on the date of transfer was 10,568m. On 27 June 2011 the Bank received new senior notes from NAMA with a total nominal value of 269m and a total initial fair value of 259m. The difference between the nominal amount of the notes received and their initial fair value is included in the loss on disposal of assets to NAMA (note 11). The new notes, which are unconditionally and irrevocably guaranteed by the Minister for Finance, accrue interest at 6 month Euribor, receivable semi annually on 1 March and 1 September. The maturity date of these new notes is March 2012 however NAMA may, with the agreement of the Bank, settle the notes by issuing new notes with the same terms and conditions and a maturity date of up to 364 days. There are certain key differences between the terms and conditions of the notes that were held at 31 December 2010 and those held at 30 June 2011. A new amended Offering Circular of 22 June 2011 does not include an issuer extension option and the holder now has the right to reject physical settlement of the notes on maturity. At 30 June 2011 and 31 December 2010 all senior notes were used in sale and repurchase agreements under open market operations with central banks.
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24. Loans and advances to customers
30 June 2011 m 44 24,133 24,177 (8,706) 15,471
31 December 2010 m 49 33,892 33,941 (9,577) 24,364
30 June 2010 m 57 36,926 36,983 (7,505) 29,478
Amounts receivable under finance leases and hire purchase contracts Other loans and advances to customers Provisions for impairment
Loans and advances to customers at 30 June 2011 of 15,471m (31 December 2010: 24,364m; 30 June 2010: 29,478m) exclude loans classified as held for sale of 6,660m (31 December 2010: 1,623m; 30 June 2010: 16,566m) (note 19). The Group's loans and advances to customers include loans to equity-accounted joint venture interests of 1,008m (31 December 2010: 1,056m; 30 June 2010: 1,089m) and loans of 37m (31 December 2010: 126m; 30 June 2010: 129m) to joint venture interests held in respect of liabilities to customers under investment contracts. Provisions for impairment on loans and advances to customers 30 June 2011 m 9,577 903 (209) (308) 1 (98) (274) (886) 8,706 7,711 995 8,706 13,567 31 December 2010 m 4,846 4,956 21 (363) 1 (168) 99 185 9,577 8,341 1,236 9,577 16,564 30 June 2010 m 4,846 2,492 27 (95) 1 (72) 300 6 7,505 6,233 1,272 7,505 13,957
At beginning of period Charge against profits - specific (note 13) Charge against profits - collective (note 13) Write-offs Recoveries Unwind of discount Exchange movements Net transfers (to)/from assets classified as held for sale (note 19) At end of period Specific Collective Total Impaired loans (excludes loans classified as held for sale)
The collective provision of 995m (31 December 2010: 1,236m; 30 June 2010: 1,272m) has been calculated based on total performing customer loan balances, including those classified as held for sale. The reduction in collective provisions of 209m in the current period is primarily due to a decrease of 18% in the performing loan portfolio, including loans classified as held for sale, and the recognition of specific provisions on smaller relationships not previously individually assessed for impairment. Owing to a marked deterioration in the financial position of some borrowers, in order for the Bank to maximise the recovery of impaired loan balances it may in certain specific circumstances agree to a restructuring of loan arrangements so as to improve overall asset quality. The level of provision write-offs in the current and prior periods is primarily as a result of the active management of impaired loans, which may also include the sale of collateral and/or certain loan assets to third parties. Loans assigned as collateral Loans, including those classified as held for sale, of 3,154m (31 December 2010: 9,384m; 30 June 2010: 16,029m) have been assigned as collateral under the Bank's various covered securities programmes. The Bank's UK covered bond programme was unwound in June 2011 (note 27). In addition, loans with a carrying value of 2,727m (31 December 2010: 4,110m; 30 June 2010: 2,754m) have been assigned as collateral under a Master Loan Repurchase Agreement with the Central Bank of Ireland (note 25). All of the loans remain in the Group's statement of financial position as substantially all of the risks and rewards relating to them are retained. An analysis of lending assets by internal credit quality category, geographical location and industry sector concentration is provided in note 37.
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25. Deposits from banks
30 June 2011 m 133 40,757 335 41,225
31 December 2010 m 54 45,023 545 944 46,566
30 June 2010 m 27 26,259 5,089 1,926 33,301
Deposits repayable on demand Sale and repurchase agreements - central banks Sale and repurchase agreements - banks Other deposits by banks with agreed maturity dates
Sale and repurchase agreements with central banks include 2.4bn (31 December 2010: 16.9bn; 30 June 2010: 14.7bn) borrowed under open market operations from central banks. The decrease in funding under these facilities is primarily due to the transfer of 12.2bn of NAMA senior bonds to AIB on 24 February 2011 under the AIB Transfer Order (note 10). Furthermore certain of the Bank's securitisation programmes no longer qualified as eligible collateral under open market operations. A combined 38.4bn (31 December 2010: 28.1bn; 30 June 2010: 11.6bn) was also borrowed under a Special Master Repurchase Agreement, a Master Loan Repurchase Agreement, and a Facility Deed agreement from the Central Bank of Ireland. Other deposits by banks with agreed maturity dates in the Group include 286m (31 December 2010: 299m; 30 June 2010: 284m) of funding provided to policyholders by external banks in respect of liabilities to customers under investment contracts (note 28).
26. Customer accounts
30 June 2011 m 2 687 689
31 December 2010 m 3,771 7,321 11,092
30 June 2010 m 7,337 15,819 23,156
Repayable on demand Other deposits by customers with agreed maturity dates
Customer type Retail deposits Non-retail deposits 182 507 689 6,120 4,972 11,092 11,656 11,500 23,156
On 24 February 2011, under the AIB Transfer Order, the majority of the Irish and UK customer accounts, including those held in the Bank's Isle of Man subsidiary, were transferred by the Bank to AIB and AIB UK (note 10). Certain customer accounts were retained, including those linked to customer loans, structured deposit-linked products and those accounts denominated in minor currencies. In total 8.3bn (Ireland and UK: 6.9bn; Isle of Man: 1.4bn) of customer accounts were transferred. Deposits introduced through the Bank's branches in Vienna, Dusseldorf and Jersey remained unaffected by the AIB Transfer Order and as such did not transfer at the time. However, in accordance with the February Direction Order and the requirements imposed on the Bank by the Minister for Finance on 7 April 2011 pursuant to Section 50 of CISA, all deposits introduced through these branches have been repaid to customers. The Banks branches in Jersey and Vienna were both closed in June 2011. Furthermore, the Banks branch in Dusseldorf is in the process of being closed. Customer accounts includes balances of 31m (31 December 2010: 31m; 30 June 2010: 30m) in respect of deposits which were designated at fair value upon initial recognition.
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27. Debt securities in issue
30 June 2011 m 5,684 -
31 December 2010 m 6,899 -
30 June 2010 m 14,639 170
Medium term note programme Covered bonds Short term programmes: Commercial paper Certificates of deposit
5,684
13 6,912
1,605 104 16,518
Debt securities in issue have decreased by 1.2bn in the current period largely due to the maturity of 1.1bn of medium term notes. In addition, short term programmes matured in full at the end of May 2011. The ELG Scheme has been extended for certain eligible liabilities to 31 December 2011. Fees payable under this scheme are set out in note 2.
28. Liabilities to customers under investment contracts

Assets held in respect of liabilities to customers under investment contracts: Investment property Financial assets at fair value through profit or loss Loans and advances to banks Total Less: Funding provided by parent Bank Funding provided by external banks Derivative financial instruments Net asset value attributable to external unitholders Add: Funds on deposit with parent Bank Liabilities to customers under investment contracts at fair value
30 June 2011 m
31 December 2010 m
30 June 2010 m
1,168 215 9 1,392 (770) (286) (62) (35) 83 322
1,193 237 13 1,443 (764) (299) (84) (37) 92 351
1,228 239 5 1,472 (785) (284) (112) (39) 114 366
Under the terms of the investment contracts issued by the Group's assurance business legal title to the underlying investments is held by the Group, but the inherent risks and rewards in the investments are borne by customers through unit-linked life assurance policies. In the normal course of business the Group's financial interest in such investments is restricted to fees earned for contract set up and investment management. In accordance with IFRS, obligations under investment contracts are carried at fair value in the statement of financial position and are classified as liabilities to customers under investment contracts. The above table sets out where the relevant assets and liabilities in respect of the life assurance business investment contracts are included in the Group statement of financial position. On consolidation, Group loans and advances to customers and Group loans classified as held for sale are shown net of funding of 755m (31 December 2010: 749m; 30 June 2010: 766m) and 15m (31 December 2010: 15m; 30 June 2010: 19m) respectively provided by the parent Bank to fund assets held by the life assurance business in respect of liabilities to customers under investment contracts. Total funding provided by the parent Bank amounts to 921m (31 December 2010: 954m; 30 June 2010: 991m). 770m represents the current market value of assets, net of related derivative liabilities, to which the parent Bank holds recourse. The Group has assessed these lending facilities for impairment, with any resulting charge included within provisions for impairment on loans and advances to customers. Derivative financial instruments are entered into by the Group's assurance company in order to hedge the interest rate exposure on funding provided to geared policyholder funds. The decrease in liabilities to customers under investment contracts in the current period results primarily from net withdrawals by policyholders from unit-linked investment funds during the period.
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29. Other liabilities
30 June 2011 m 70 71 35 136 312
31 December 2010 m 64 138 37 201 135 575
30 June 2010 m 83 41 39 26 4 193
Obligations under financial guarantees Payable to NAMA Amounts attributable to external unitholders linked to investment contracts (note 28) Sundry liabilities Provisions for liabilities and charges Total
The amount payable to NAMA at 30 June 2011 of 71m relates to value-to-transfer adjustments (representing the movement in loan balances from the NAMA cut off date to the actual loan transfer date) regarding transfers to NAMA that occurred in November and December 2010. The decrease in sundry liabilities primarily relates to the redemption of covered bonds in issue of 171m which occurred on 30 December 2010 but which did not settle until 5 January 2011. The Bank has undertaken a review of interest rates applied to loan accounts to identify any differences between the interest rates applied and the variable market quoted rates. The review has been extended to cover the period from 1 January 1990 to 31 January 2005 (previously 1 January 1996 to 31 January 2005), and the Bank has increased the amount provided in relation to this matter from 45m at 31 December 2010 to 67m at 30 June 2011. This provision is included in provisions for liabilities and charges. Provisions for liabilities and charges also include provisions for staff redundancies and legacy matters.
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30. Subordinated liabilities and other capital instruments

Dated Loan Capital US$165m Subordinated Notes Series A 2015 US$35m Subordinated Notes Series B 2017 750m Floating Rate Subordinated Notes 2014 500m Callable Floating Rate Subordinated Notes 2016 750m Callable Floating Rate Subordinated Notes 2017 Undated Loan Capital Stg300m Non-Cumulative Preference Shares Stg200m Step-up Callable Perpetual Capital Securities Stg250m Tier One Non-Innovative Capital Securities 600m Perpetual Preferred Securities Stg300m Step-up Perpetual Subordinated Notes 600m Fixed/Floating Perpetual Preferred Securities Stg350m Fixed/Floating Perpetual Preferred Securities Other subordinated liabilities
30 June 2011 m 115 25 -
31 December 2010 m 124 28 -
30 June 2010 m 139 29 325 500 749
335 475
351 3 3 509
372 25 42 134 54 77 1 2,447
All subordinated liabilities and other capital instruments issued by the Group are unsecured and subordinated in the right of repayment to the ordinary creditors, including depositors of the Bank. The prior approval of the Central Bank of Ireland is required to redeem these issues prior to their final maturity date. The carrying value of subordinated liabilities and other capital instruments includes the impact of fair value hedge adjustments. During the prior year the Group repurchased or restructured certain subordinated liabilities as part of a liability management exercise. 270m nominal of Tier 1, 45m of upper Tier 2 and 1,575m of Lower Tier 2 securities were repurchased, exchanged or restructured, resulting in a net gain of 1,589m (note 6). Interest on the Stg200m Step-up Callable Perpetual Capital Securities and the Stg250m Tier One Non-Innovative Capital Securities of 6m which was accrued to 31 December 2010 was released to the income statement as a gain in March 2011 when the call right on these securities was exercised by the Bank with no accrued interest being paid.
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31. Share capital

Ordinary share capital Authorised 26,200,000,000 ordinary shares of 0.16 each Allotted, called up and fully paid 25,769,150,409 ordinary shares of 0.16 each
30 June 2011 m
31 December 2010 m
30 June 2010 m
4,192
4,192
4,192
4,123
4,123
4,123
On 21 January 2009, under the terms of the Anglo Irish Bank Corporation Act, 2009, all of the Bank's ordinary share capital was transferred to the Minister for Finance.
32. Capital reserve
30 June 2011 m 25,300
31 December 2010 m 25,300
30 June 2010 m 18,880
Capital reserve
On 22 December 2009 the Banks sole shareholder, the Minister for Finance, wrote to the Bank outlining his commitment, subject to EU State Aid approval, to ensure that the Bank had sufficient capital to continue to meet regulatory capital requirements at 31 December 2009. On 23 December 2009 the Board accepted the binding commitment of the Minister. The Bank recognised a receivable from the Minister on 31 December 2009 on the basis that it was virtually certain to occur, and a corresponding credit to the capital reserve. On 31 March 2010, the Bank received an initial promissory note to the value of 8.3bn from the Minister. The promissory note provided for the issuance of adjustment instruments which could amend the original principal amount of the note. On 28 May and 23 August 2010, the Minister issued adjustment instruments increasing the principal amount of the 31 March promissory note to 18.88bn, resulting in corresponding credits to the capital reserve. A revised promissory note was issued by the Minister in December 2010 in exchange for the initial promissory note and the two adjustment instruments. This revised promissory note included an additional 6.42bn principal amount, settling an amount due from Shareholder at 30 November 2010. This resulted in a corresponding credit of 6.42bn to the capital reserve, increasing it from 18.88bn to 25.3bn at 31 December 2010. The capital reserve qualifies as eligible regulatory Core Tier 1 capital.
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33. Other reserves

Non-distributable capital reserve This is a non-distributable capital reserve. The balance on the reserve at 30 June 2011 was 1m (31 December 2010: 1m; 30 June 2010: 1m). Exchange translation reserve The exchange translation reserve has two components. It includes the cumulative foreign exchange differences arising from translating the income statements of foreign operations at average exchange rates and the translation of the statements of financial position of foreign operations using exchange rates ruling at the period end. It also includes the cumulative foreign exchange differences arising from the translation of the Group's investments in foreign operations, net of exchange differences arising on funding designated as hedges of these investments. 30 June 2011 m Movement in exchange translation reserve At beginning of period Exchange differences on translation of foreign operations Net gain/(loss) on hedges of net investments in foreign operations At end of period 3 (71) 41 (27) (56) 88 (29) 3 (56) 167 (130) (19) 31 December 2010 m 30 June 2010 m
Cash flow hedging reserve The cash flow hedging reserve represents the effective portion of the cumulative net change in the fair value of derivatives designated as cash flow hedges. It is stated net of deferred taxation. 30 June 2011 m Movement in cash flow hedging reserve At beginning of period Net changes in fair value Transfers to income statement At end of period 57 (15) 42 110 32 (85) 57 110 31 (55) 86 31 December 2010 m 30 June 2010 m
Available-for-sale reserve The available-for-sale reserve represents the unrealised net gains and losses in the fair value of available-for-sale financial assets as adjusted for any impairment losses recognised in the income statement. Changes in fair value include movements on associated fair value hedges. The reserve is stated net of deferred taxation. 30 June 2011 m Movement in available-for-sale reserve At beginning of period Net changes in fair value Impairment recognised in income statement Transfers to income statement Foreign exchange and other movements At end of period (190) 23 1 (166) (207) (113) 11 110 9 (190) (207) (55) 10 30 4 (218) 31 December 2010 m 30 June 2010 m
The available-for-sale reserve consists of unrealised losses on bank securities of 111m (31 December 2010: 107m; 30 June 2010: 66m), on NAMA subordinated bonds of 42m (31 December 2010: 70m; 30 June 2010: 79m), on sovereign securities of 14m (31 December 2010: 12m; 30 June 2010: unrealised gains of 8m), on residential mortgage backed securities of nil (31 December 2010: nil; 30 June 2010: 53m), offset by unrealised gains on asset backed securities of 1m (31 December 2010: unrealised losses of 1m; 30 June 2010: unrealised losses of 28m).
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34. Income tax effects relating to other comprehensive income
6 months ended 30 June 2011 Before tax amount m (5) (15) 24 (30) (26) Tax benefit/ (expense) m Net of tax amount m (5) (15) 24 (30) (26)
Net actuarial losses in retirement benefit schemes Net change in cash flow hedging reserve Net change in available-for-sale reserve Foreign exchange translation
6 months ended 30 June 2010 Before Tax tax benefit/ amount (expense) m m Net actuarial losses in retirement benefit schemes Net change in cash flow hedging reserve Net change in available-for-sale reserve Foreign exchange translation (16) (24) (11) 37 (14) -
Net of tax amount m (16) (24) (11) 37 (14)
Year ended 31 December 2010 Before Tax tax benefit/ amount (expense) m m Net actuarial losses in retirement benefit schemes Net change in cash flow hedging reserve Net change in available-for-sale reserve Foreign exchange translation (7) (53) 17 59 16 -
Net of tax amount m (7) (53) 17 59 16
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35. Contingent liabilities, commitments and other contingencies

Contingent liabilities Guarantees and irrevocable letters of credit Performance bonds and other transaction related contingencies Commitments Credit lines and other commitments to lend
30 June 2011 m 106 25 131 457
31 December 2010 m 175 48 223 552
30 June 2010 m 201 68 269 1,091
Regulatory reviews and enquiries In the period since December 2008, various authorities and regulatory bodies in Ireland (including the Central Bank of Ireland, the Office of the Director of Corporate Enforcement, the Chartered Accountants Regulatory Board, the Irish Auditing & Accounting Supervisory Authority, the Garda Bureau of Fraud Investigation and the Irish Stock Exchange) have initiated investigations (including criminal investigations in some cases) into certain aspects of the Banks business including certain loan and other transactions involving former Directors and certain third parties. These investigations are ongoing and it is not possible at this stage to give any indication as to whether they will result in civil, administrative or criminal proceedings against the Bank or any of its current or former Directors or Officers. In addition, certain correspondence has been received by the Bank and by certain former Directors of the Bank alleging an entitlement to compensation in respect of alleged wrongdoing by the Bank and/or by such former Directors. At this stage, only one such proceeding has been served on the Bank, though no statement of claim has as yet been served by the plaintiff. Legal claims In the normal course of the Banks business and operations, litigation arises from time to time. The Bank has a policy of active management and rigorous defence of legal claims and there are procedures in place to ensure the oversight of claims by the Risk & Compliance Committee. At 30 June 2011, the Bank is engaged in a number of ongoing legal proceedings. Other than the regulatory reviews and enquiries referred to above, the only significant additional proceedings, which are ongoing, are as follows: (i) In proceedings brought in the Commercial Court in Dublin, a number of investors in the Anglo Irish New York Hotel Fund have sought the return of their investment together with interest and costs. The Bank raised a full defence in response to these claims. The hearing of the litigation took place in February and March 2011 and as at 30 June 2011 the Courts decision was awaited. On 2 June 2011 the arbitrator in the related New York arbitration brought by the Bank against the General Partner of the Fund, held for the Bank in ordering the removal of the General Partner of the Fund, and the arbitrator ruled against the General Partner in relation to its counterclaim. On 27 July 2011 the Commercial Court delivered its decision in the New York Hotel Fund litigation. The Court found in favour of the Bank against all of the claims made by the lead plaintiff of the litigating investors. In particular the Court held that there was no fraud or negligence or regulatory breach on the part of the Bank. On 14 February 2011 the Bank received notice that holders of certain subordinated loan notes, having an aggregate par value of $200,000,000, filed a claim for relief seeking a restraining order and injunction against the Bank in the United States. The proceedings relate to alleged breaches of certain covenants contained in the documentation governing the loan notes in question. The Bank has raised a full defence in response to the claim. No additional information in respect of the dispute is being provided, as to do so could prejudice the position of the Group in relation to the proceedings. On 15 April 2011 the Bank was served with English High Court proceedings that have issued against the Bank in relation to an exchange offer regarding subordinated floating rate notes due in 2017. The Bank intends raising a full defence to the claim and the proceedings are due to be heard by the English High Court in June 2012. No additional information in respect of the dispute is being provided, as to do so could prejudice the position of the Group in relation to the proceedings. On 16 May 2011, the wife and children of Sean Quinn issued Irish High Court proceedings against the Bank and a share receiver appointed by the Bank, in which declarations have been sought seeking, amongst other things, to set aside various loan agreements and security documents entered into by certain members of the Quinn family with the Bank. The proceedings, which were admitted to the Commercial List of the High Court on 30 May 2011, also include an unspecified claim for damages. The Bank intends to vigorously defend the proceedings. No additional information in respect of the dispute is being provided, as to do so could prejudice the position of the Group in relation to the proceedings.
(ii)
(iii)
(iv)
58
Guarantees In the normal course of business, the Group is a party to financial instruments with off balance sheet risk to meet the financing needs of customers. These instruments involve, to varying degrees, elements of risks which are not reflected in the statement of financial position. Guarantee contracts expose the Bank to the possibility of sustaining a loss if the other party to the financial instrument fails to perform in accordance with the terms of the contract. Even though these obligations may not be recognised in the statement of financial position, they do contain risk and are therefore part of the overall risk of the Bank (see note 37). In addition to the above, the Bank has given guarantees in respect of certain subsidiaries. Indemnity The TSA concluded between the Bank, AIB and AIB UK at the time of the AIB Transfer Order in respect of the transfer of certain of the Banks deposits and assets, and shares held by the Bank in its Isle of Man deposit taking subsidiary, Anglo Irish Bank Corporation (International) PLC, contained an indemnity from the Bank in favour of AIB and AIB UK, subject to certain exclusions from liability, in respect of certain direct liabilities which could arise in connection with the deposits, assets or entity which transferred. NAMA The Group may be required to indemnify NAMA in respect of various matters, including NAMAs potential liability arising from any error, omission or misstatement on the part of the Group in the information provided to NAMA. Any claim by NAMA in respect of those indemnities, depending on its nature, scale and factual context, could have a material adverse effect on the Group.
36. Statement of cash flows
Other non-cash items Loans and advances written-off net of recoveries Depreciation and amortisation Net increase in prepayments and accrued income Net (decrease)/increase in accruals and deferred income Share of results of joint ventures Net losses on disposal of available-for-sale financial assets
6 months ended 30 June 2011 m (539) 12 (9) (45) 2 1 (578)
6 months ended 30 June 2010 m (94) 12 (5) 12 40 30 (5)
Year ended 31 December 2010 m (381) 26 (11) 33 104 110 (119)
Cash and cash equivalents Cash and balances with central banks Loans and advances to banks (with a maturity of less than three months) At end of period
30 June 2011 m 255 325 580
30 June 2010 m 79 3,427 3,506
31 December 2010 m 181 1,388 1,569
Loans and advances to banks (with a maturity of less than three months) excludes cash collateral placed with counterparties to offset mark to market valuations arising from derivative contracts (note 18).
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37. Risk management

Since the Bank was taken into State ownership in 2009, the new management team has focussed on the stabilisation and derisking of the Bank, while maximising the recovery of outstanding loans. As set out in the Restructuring Plan, the Bank's primary strategic objective is the working out of its assets in an orderly process over time, while minimizing the loss to the Irish taxpayer. In this regard, the balance sheet continues to be reduced and managed in the public interest. Total assets decreased by 18bn during the period primarily due to the transfer of NAMA senior bonds to AIB pursuant to the AIB Transfer Order, the ongoing deleveraging of the loan portfolio and receipt of the first payment due on the promissory note. From a funding and liquidity perspective, the Bank is reliant on the ongoing support of its shareholder and the relevant Authorities. In the normal course of its business activities the Group is subject to a variety of risks and uncertainties. This update on key risks should be read in conjunction with the description of the principal risks and uncertainties facing the Group set out on pages 16 to 20. Pages 109 to 136 of the Group's 2010 Annual Report and Accounts provide details of the risk management and control framework in place in the Bank and set out the key risks which could impact the Banks future results and financial position. Credit risk, lending asset quality and impairment Credit risk is defined as the risk that the Group will suffer a financial loss from a counterpartys failure to pay interest, repay capital or meet a commitment and the collateral pledged as security is insufficient to cover the payments due. The Group's credit risk arises from transactions with external counterparties, including sovereign states. The Bank's largest exposures relate to the promissory note and its lending activities to customers, but also include interbank lending, investment in available-forsale debt securities and derivative transactions. A credit ratings profile of loans and advances to banks is provided in note 18 and an external ratings profile of investment securities classified as available-for-sale is set out in note 21. Details of derivative contracts are provided in note 17, and details of the promissory note are set out in note 22. Maximum exposure to credit risk The following table presents the Group's maximum exposure to credit risk before collateral or other credit enhancements. Included below are contingent liabilities and commitments to lend, which are not recognised in the consolidated statement of financial position. The Group 30 June 2011 m Exposures in the consolidated statement of financial position Cash and balances with central banks Financial assets at fair value through profit or loss - held on own account * Derivative financial instruments Loans and advances to banks Assets classified as held for sale Available-for-sale financial assets * Promissory note Government debt securities at amortised cost Loans and advances to customers Exposures not recognised in the consolidated statement of financial position Contingent liabilities Commitments to lend Maximum exposure to credit risk * Excludes equity shares Where financial instruments are recorded at fair value, the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise as a result of changes in fair value. In addition to the above, other assets at 31 December 2010 included financial assets of 67m which settled in early January 2011. 131 457 53,232 223 552 71,718 255 1,888 2,021 6,681 1,510 23,804 259 16,226 181 1,936 3,512 1,655 2,219 25,704 10,623 25,113 31 December 2010 m
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Loans and advances to customers and assets classified as held for sale include 755m (31 December 2010: 749m) and 15m (31 December 2010: 15m) respectively lent in relation to assets held in respect of liabilities to customers under investment contracts (note 28) as the Group is exposed to credit risk in respect of this lending. Loans and advances to banks exclude 9m (31 December 2010: 13m) advanced on behalf of policyholders under investment contracts (note 28) as the Group is not exposed to credit risk in respect of these advances. Contingent liabilities includes 106m (31 December 2010: 175m) in respect of financial guarantees. In addition, the TSA concluded between the Bank, AIB and AIB UK contains an indemnity from the Bank in favour of AIB and AIB UK, subject to certain exclusions from liability, in respect of certain direct liabilities which could arise in connection with the deposits, assets or entity which transferred. Large exposures The top 20 customer groups, excluding loans classified as held for sale, represent 8.6bn or 35% (31 December 2010: 9.1bn or 26%) of the Group's total loans and advances to customers before provisions for impairment. Total specific impairment provisions on these customer groups amount to 2.8bn (31 December 2010: 3.1bn). Of the top 20 customer groups, one group accounts for 11% (31 December 2010: 8%) of total loans and advances to customers. A regulatory customer group typically consists of a number of connected entities and the balances represent multiple individual loans secured by diverse portfolios of assets and multiple contracted cash flows. Interbank placements with, and investments in debt securities issued by, Irish financial institutions covered under the ELG Scheme total 0.5bn (31 December 2010: 1.1bn). Lending asset quality Credit risk arises primarily on loans and advances to customers and loans classified as held for sale. At 30 June 2011 loans and advances to customers were 24,177m (31 December 2010: 33,941m) before provisions for impairment of 8,706m (31 December 2010: 9,577m) and loans classified as held for sale were 7,886m (31 December 2010: 2,188m) before provisions for impairment of 1,226m (31 December 2010: 565m). The Group monitors lending asset quality, including on loans classified as held for sale, 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. Good quality Good quality ratings apply to exposures that are performing as expected and are of sound financial standing. These exposures are considered low to moderate risk. Satisfactory quality This rating applies to exposures that continue to perform satisfactorily, but are subject to closer monitoring. Lower quality but not past due or impaired This rating applies to exposures that require increased management attention to prevent any deterioration in asset quality. No evidence of specific impairment exists. Past due but not impaired These are loans and receivables where contractual interest or principal payments are one day or more past due. As at the end of the reporting period there is no objective evidence of impairment due to the level of collateral and/or personal recourse available to the Group. Impaired loans Loans are classified as impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the loan. The loan is impaired if that loss event (or events) has had an impact such that the estimated present value of future cash flows is less than the current carrying value and can be reliably measured.
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37. Risk management continued

Loans and advances to customers Asset quality - profile of loans and advances to customers 30 June 2011 Commercial m Good quality Satisfactory quality Lower quality but not past due or impaired Total neither past due or impaired Past due but not impaired Impaired loans Provisions for impairment Less: Lending to policyholders in respect of investment contracts (note 28) Total (755) 15,471 2,948 3,045 5,993 2,636 9,097 17,726 (5,020) 12,706 Residential m 147 23 170 363 767 1,300 (559) 741 Business Banking m 347 76 205 628 381 2,261 3,270 (1,922) 1,348 Other Lending m 494 165 659 535 1,442 2,636 (1,205) 1,431 Total m 3,936 76 3,438 7,450 3,915 13,567 24,932 (8,706) 16,226
Provisions for impairment on loans and advances to customers Commercial m At beginning of period Charge against profits Write-offs Recoveries Unwind of discount Exchange movements Net transfers from/(to) assets classified as held for sale At end of period Specific Collective Total 5,702 495 (235) (74) (177) (691) 5,020 4,400 620 5,020 Residential m 692 70 (16) 1 (8) (33) (147) 559 507 52 559
30 June 2011 Business Banking m 1,865 124 (23) (11) (17) (16) 1,922 1,766 156 1,922 Other Lending m 1,318 5 (34) (5) (47) (32) 1,205 1,038 167 1,205 Total m 9,577 694 (308) 1 (98) (274) (886) 8,706 7,711 995 8,706
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31 December 2010 Commercial m Good quality Satisfactory quality Lower quality but not past due or impaired Total neither past due or impaired Past due but not impaired Impaired loans Provisions for impairment Less: Lending to policyholders in respect of investment contracts (note 28) Total (749) 24,364 6,183 911 3,850 10,944 3,363 11,145 25,452 (5,702) 19,750 Residential m 447 35 365 847 384 1,515 2,746 (692) 2,054 Business Banking m 445 79 73 597 417 2,438 3,452 (1,865) 1,587 Other Lending m 292 10 40 342 1,232 1,466 3,040 (1,318) 1,722 Total m 7,367 1,035 4,328 12,730 5,396 16,564 34,690 (9,577) 25,113
Provisions for impairment on loans and advances to customers Commercial m At beginning of year Charge against profits Write-offs Recoveries Unwind of discount Exchange movements Net transfers from/(to) assets classified as held for sale and sectoral reclassification At end of year Specific Collective Total 2,862 2,634 (156) 1 (119) 33 Residential m 315 309 (10) (18) (26)
31 December 2010 Business Banking m 743 1,647 (193) (24) 28 Other Lending m 926 387 (4) (7) 64 Total m 4,846 4,977 (363) 1 (168) 99
447 5,702 4,979 723 5,702
122 692 623 69 692
(336) 1,865 1,694 171 1,865
(48) 1,318 1,045 273 1,318
185 9,577 8,341 1,236 9,577
The charge against profits includes collective provisions for impairment analysed on a portfolio basis.
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Aged analysis of loans and advances to customers past due but not impaired The following tables present an analysis of loans and advances to customers where contractual interest or principal payments are past due but impairment is not appropriate as the level of collateral and the present value of estimated future cash flows available to the Group is sufficient. 30 June 2011 Commercial m Past due 1 to 30 days Past due 31 to 60 days Past due 61 to 90 days Past due 91 days and over Total 1,000 19 170 1,447 2,636 Residential m 4 6 108 245 363 Business Banking m 253 6 122 381 Other Lending m 64 3 7 461 535 Total m 1,321 28 291 2,275 3,915
31 December 2010 Commercial m Past due 1 to 30 days Past due 31 to 60 days Past due 61 to 90 days Past due 91 days and over Total 1,162 502 329 1,370 3,363 Residential m 129 4 18 233 384 Business Banking m 287 1 4 125 417 Other Lending m 57 7 26 1,142 1,232 Total m 1,635 514 377 2,870 5,396
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Gross loans and advances to customers by geographical location and industry sector 30 June 2011 Ireland m Retail Office Mixed use Industrial Residential investment Residential development Business banking Personal Leisure Commercial development Other property investment Fund investment Unzoned land Total loans and advances to customers 2,273 2,580 614 221 370 350 3,236 2,206 2,129 172 903 370 29 15,453 United Kingdom m 2,263 1,581 946 495 427 153 34 27 3,219 199 131 1 3 9,479 USA m Total m 4,536 4,161 1,560 716 797 503 3,270 2,233 5,348 371 1,034 371 32 24,932
% 18% 17% 7% 3% 3% 2% 13% 9% 22% 1% 4% 1% 0% 100%
31 December 2010 Ireland m Retail Office Mixed use Industrial Residential investment Residential development Business banking Personal Leisure Commercial development Other property investment Fund investment Unzoned land Total loans and advances to customers 2,260 2,554 654 259 447 380 3,394 2,433 2,166 311 919 390 31 16,198 United Kingdom m 2,425 1,978 1,116 575 474 160 51 137 3,502 257 168 3 3 10,849 USA m 1,491 2,192 469 548 1,166 119 7 43 1,080 480 48 7,643 Total m 6,176 6,724 2,239 1,382 2,087 659 3,452 2,613 6,748 1,048 1,135 393 34 34,690
% 18% 19% 7% 4% 6% 2% 10% 8% 19% 3% 3% 1% 0% 100%
Geographical location is based on the location of the office recording the transaction. Total loans and advances to customers are stated gross of provisions and include 755m (31 December 2010: 749m) lent to fund assets held in respect of liabilities to customers under investment contracts (note 28).
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Specific provisions against loans and advances to customers by geographical location and industry sector 30 June 2011 Ireland m Retail Office Mixed use Industrial Residential investment Residential development Business banking Personal Leisure Commercial development Other property investment Fund investment Unzoned land Total specific provisions on loans and advances to customers 689 560 170 97 136 254 1,764 929 966 94 701 85 19 6,464 United Kingdom m 290 229 102 78 17 100 2 3 307 112 5 2 1,247 USA m Total m 979 789 272 175 153 354 1,766 932 1,273 206 706 85 21 7,711
% 13% 10% 3% 2% 2% 5% 23% 12% 17% 3% 9% 1% 0% 100%
31 December 2010 Ireland m Retail Office Mixed use Industrial Residential investment Residential development Business banking Personal Leisure Commercial development Other property investment Fund investment Unzoned land Total specific provisions on loans and advances to customers 504 433 146 89 115 232 1,693 914 899 210 683 87 20 6,025 United Kingdom m 258 166 94 86 19 102 1 3 308 122 2 1 2 1,164 USA m 100 262 97 60 136 19 18 359 100 1 1,152 Total m 862 861 337 235 270 353 1,694 935 1,566 432 686 88 22 8,341
% 11% 11% 4% 3% 3% 4% 20% 11% 19% 5% 8% 1% 0% 100%
Geographical location is based on the location of the office recording the transaction.
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Loans classified as held for sale Asset quality - profile of loans classified as held for sale 30 June 2011 Commercial m Good quality Satisfactory quality Lower quality but not past due or impaired Total neither past due or impaired Past due but not impaired Impaired loans Provisions for impairment Less: Lending to policyholders in respect of investment contracts (note 28) Total (15) 6,660 2,025 125 1,052 3,202 733 2,494 6,429 (932) 5,497 Residential m 176 19 264 459 67 779 1,305 (216) 1,089 Business Banking m 12 4 16 (4) 12 Other Lending m 16 16 45 90 151 (74) 77 Total m 2,201 144 1,332 3,677 857 3,367 7,901 (1,226) 6,675
Provisions for impairment on loans classified as held for sale Commercial m At beginning of year Charge against profits Write-offs Unwind of discount Exchange movements Provisions on loans received back from NAMA (note 19) Net transfers from loans and advances to customers Released on disposal of assets to NAMA At end of year Specific Total 392 20 (170) (3) (22) 24 691 932 932 932 Residential m 127 9 (62) (1) (6) 2 147 216 216 216
30 June 2011 Business Banking m 4 (16) 16 4 4 4 Other Lending m 46 3 16 2 32 (25) 74 74 74 Total m 565 36 (232) (4) (28) 28 886 (25) 1,226 1,226 1,226
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Asset quality - profile of loans classified as held for sale continued 31 December 2010 Commercial m Good quality Satisfactory quality Lower quality but not past due or impaired Total neither past due or impaired Past due but not impaired Impaired loans Provisions for impairment Less: Lending to policyholders in respect of investment contracts (note 28) Total (15) 1,623 186 392 578 434 688 1,700 (392) 1,308 Residential m 72 58 130 43 237 410 (127) 283 Business Banking m 3 3 3 Other Lending m 2 2 34 54 90 (46) 44 Total m 260 450 710 514 979 2,203 (565) 1,638
Provisions for impairment on loans classified as held for sale Commercial m At beginning of year Charge against profits Write-offs Recoveries Unwind of discount Exchange movements Net transfers (to)/from loans and advances to customers and sectoral reclassification Released on disposal of assets to NAMA At end of year Specific Total 5,841 1,664 (8) (150) 30 Residential m 2,814 665 (11) (75) 21
31 December 2010 Business Banking m 180 11 (2) 9 Other Lending m 1,285 343 (18) 9 Total m 10,120 2,683 (19) (245) 69
(130) (6,855) 392 392 392
(95) (3,192) 127 127 127
(22) (176) -
62 (1,635) 46 46 46
(185) (11,858) 565 565 565
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Aged analysis of loans classified as held for sale past due but not impaired The following tables present an analysis of loans classified as held for sale where contractual interest or principal payments are past due but impairment is not appropriate as the level of collateral and the present value of estimated future cash flows available to the Group is sufficient. 30 June 2011 Commercial m Past due 1 to 30 days Past due 31 to 60 days Past due 61 to 90 days Past due 91 days and over Total 189 25 10 509 733 Residential m 1 37 29 67 Business Banking m 4 8 12 Other Lending m 2 43 45 Total m 196 25 47 589 857
31 December 2010 Commercial m Past due 1 to 30 days Past due 31 to 60 days Past due 61 to 90 days Past due 91 days and over Total 10 18 88 318 434 Residential m 20 23 43 Business Banking m 3 3 Other Lending m 34 34 Total m 33 18 88 375 514
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Gross loans classified as held for sale by geographical location and industry sector 30 June 2011 Ireland m Retail Office Mixed use Industrial Residential investment Residential development Business banking Personal Leisure Commercial development Other property investment Fund investment Unzoned land Total loans classified as held for sale 342 122 48 4 52 51 11 105 150 16 22 1 7 931 United Kingdom m 252 26 5 1 25 2 311 USA m 1,336 1,842 448 456 1,120 77 5 35 851 445 44 6,659 Total m 1,930 1,964 496 486 1,172 133 16 141 1,001 486 66 3 7 7,901
% 24% 25% 6% 6% 15% 2% 0% 2% 13% 6% 1% 0% 0% 100%
31 December 2010 Ireland m Retail Office Mixed use Industrial Residential investment Residential development Business banking Personal Leisure Commercial development Other property investment Fund investment Unzoned land Total loans classified as held for sale 345 127 33 46 39 3 78 148 13 19 11 862 United Kingdom m 287 59 61 34 26 43 1 107 618 USA m 26 80 8 169 87 44 309 723 Total m 658 186 174 42 241 169 3 79 192 429 19 11 2,203
% 30% 8% 8% 2% 11% 8% 0% 4% 9% 19% 1% 0% 0% 100%
Geographical location is based on the location of the office recording the transaction. Total loans classified as held for sale are stated gross of provisions and include 15m (31 December 2010: 15m) lent to fund assets held in respect of liabilities to customers under investment contracts (note 28).
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Specific provisions against loans classified as held for sale by geographical location and industry sector 30 June 2011 Ireland m Retail Office Mixed use Industrial Residential investment Residential development Business banking Personal Leisure Commercial development Other property investment Fund investment Unzoned land Total specific provisions on loans classified as held for sale 5 2 12 2 2 24 4 57 77 13 198 United Kingdom m 9 1 2 12 USA m 94 202 140 52 168 22 16 207 114 1 1,016 Total m 99 204 152 63 170 46 4 74 284 129 1 1,226
% 8% 17% 12% 5% 14% 4% 0% 6% 23% 11% 0% 0% 0% 100%
31 December 2010 Ireland m Retail Office Mixed use Industrial Residential investment Residential development Business banking Personal Leisure Commercial development Other property investment Fund investment Unzoned land Total specific provisions on loans classified as held for sale 23 46 75 11 155 United Kingdom m 12 9 16 24 61 USA m 15 58 6 47 57 28 138 349 Total m 27 9 74 6 47 80 46 103 173 565
% 5% 2% 13% 1% 8% 14% 0% 8% 18% 31% 0% 0% 0% 100%
Geographical location is based on the location of the office recording the transaction.
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Liquidity and funding risk Liquidity and funding risk is the risk that the Group does not have sufficient financial resources available at all times to meet its contractual and contingent cash flow obligations or can only secure these resources at excessive cost. The current objective for the management of liquidity and funding risk is to continue to meet cash flow obligations as they fall due and minimise the funding required from the Bank's stakeholders. The future funding and liquidity strategy and balance sheet structure will be largely reliant on the Minister for Finance as shareholder and the relevant Authorities. This will take into account the long term best interests of the wider Irish banking sector in a manner consistent with the EU/IMF Programme for the Recovery of the Irish Banking system. Following the transfer of the majority of the customer deposit book to AIB and AIB UK on 24 February 2011, the Bank's reliance on support from central banks, including access to special funding facilities, has further increased. The Group currently borrows from central banks through both open market operations with monetary authorities and through special funding facilities with the Central Bank of Ireland (note 25). The Group has total borrowings from central banks at 30 June 2011 of 40.8bn (31 December 2010: 45.0bn), including 38.4bn (31 December 2010: 28.1bn) borrowed through these special funding facilities. Structural foreign exchange risk principally arises from the funding shortfall between the Group's sterling and US dollar lending activities and the Group's funding in those currencies. The deposit outflow in non-euro currencies, and the transfer of sterling and US dollar deposits to AIB and AIB UK in February 2011, have increased this funding shortfall which has been replaced by the use of forward foreign exchange hedging. The availability of counterparty lines has continued to reduce during the period and it is the subject of ongoing management through the Financial Markets division in conjunction with the Authorities and the Group's stakeholders. The long term foreign exchange swap agreements executed with the NTMA in March and April 2011, and detailed in note 17, have led to a significant improvement in the Group's US dollar and sterling funding. These transactions have provided US dollar and sterling funding in exchange for euros and reduced the requirement to source US dollars and sterling in the interbank or wholesale foreign exchange markets. In November 2010, the Minister for Finance put in place a guarantee for the Bank which covered amounts payable in relation to derivative and certain other interbank transactions. In accordance with the terms of this guarantee, the Bank may only enter into derivative transactions for balance sheet management purposes. There is no fee payable for this guarantee. In the context of liquidity and funding risk the Bank actively monitors compliance with the contractual covenants contained in the Groups debt securities programmes and subordinated capital instruments. Significantly, CISA includes important provisions that are designed to prevent rights in respect of default related matters becoming exercisable because of an order or requirement made under CISA or anything done on foot of such an order or requirement. The following table analyses the Groups non-derivative financial liabilities into current or non-current maturity groupings, based on the remaining period to the contractual maturity date as at 30 June 2011 and 31 December 2010. Financial liabilities are classified as current if they have a contractual maturity within 12 months of the reporting date. The table is prepared on the basis of remaining contractual maturity and does not incorporate behavioural assumptions regarding expected cash flows. 30 June 2011 Current m Financial liabilities Deposits from banks Customer accounts Debt securities in issue Subordinated liabilities and other capital instruments * 41,225 662 4,331 46,218 27 1,353 475 1,855 46,267 10,815 2,118 59,200 299 277 4,794 509 5,879 Non-Current m 31 December 2010 Current m Non-Current m
* Undated subordinated liabilities and other capital instruments have been included in non-current financial liabilities. Liabilities to customers under investment contracts are excluded as the underlying liquidity risk is borne by the policyholder. Derivatives are excluded as the majority of derivative transactions with interbank counterparties are covered under collateral support agreements, with cash collateral exchanged on a daily basis. The Group's credit lines and other commitments to lend of 457m (31 December 2010: 552m) (note 35) include 114m (31 December 2010: 264m) falling due within one year.
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38. Fair value hierarchy

The following table details the valuation methods used for the Group's financial assets and liabilities carried at fair value as at 30 June 2011, other than financial assets and liabilities at fair value through profit or loss held in respect of liabilities to customers under investment contracts. The classification of the instruments below is based on the lowest level input that is significant to the measurement of fair value for the instrument. The three levels of the IAS fair value hierarchy are: Level 1 values are determined by reference to unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 values are determined using inputs other than quoted prices described for level 1 but which are observable for the asset or liability either directly or indirectly. Level 3 values incorporate significant inputs for the asset or liability that are not based on observable market data (unobservable inputs). 30 June 2011 Level 1 m Financial assets Financial assets at fair value through profit or loss - held on own account Available-for-sale financial assets Derivative financial instruments Derivative financial instruments held for sale to NAMA 1,170 1,170 Financial liabilities Derivative financial instruments Other financial liabilities 1,821 1,821 7 31 38 1,828 31 1,859 142 1,429 4 1,575 13 198 459 2 672 13 1,510 1,888 6 3,417 Level 2 m Level 3 m Total m
31 December 2010 Level 1 m Financial assets Financial assets at fair value through profit or loss - held on own account Available-for-sale financial assets Derivative financial instruments Derivative financial instruments held for sale to NAMA 1,480 1,480 Financial liabilities Derivative financial instruments Other financial liabilities 2,453 2,453 7 31 38 2,460 31 2,491 572 1,325 4 1,901 13 167 611 13 804 13 2,219 1,936 17 4,185 Level 2 m Level 3 m Total m
The reduction in available-for-sale financial assets in the six months to 30 June 2011 is primarily attributable to disposals and maturities of debt securities. There were no transfers into or out of level 1 during the period. Transfers of derivative financial assets from level 2 to level 3 of 29m occurred as a result of the deterioration in credit quality of corporate clients during the period. The overall decline in level 3 derivative financial assets is due to both redemptions and maturities.
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38. Fair value hierarchy continued

Financial assets at fair value through profit or loss - held on own account The Bank's remaining portfolio of financial assets at fair value through profit or loss held on own account consists primarily of unlisted equity shares. Fair values are determined using valuation techniques which refer to observable and non-observable market data. Available-for-sale financial assets The Bank's portfolio of available-for-sale financial assets consists of debt securities and NAMA subordinated bonds only. The fair values of debt securities are primarily sourced from independent third party pricing service providers and prices received from dealer/brokers. NAMA subordinated bonds, which are valued using standard discounted cash flow techniques, are included in level 3. The Bank does not use models to value other AFS securities and does not adjust any external prices obtained. Derivative financial instruments Derivative financial instruments derive their value from the price of underlying variables such as interest rates, foreign exchange rates, credit spreads or equity or other indices. Fair values are typically estimated using industry standard valuation techniques incorporating inputs that are derived from observable market data. Derivative transactions with corporate clients which have a significant, but unobservable, counterparty credit input are classified as level 3. On the initial recognition of derivative financial instruments, any difference between the transaction price and the value derived from a valuation technique incorporating information other than observable market data is deferred. During the period net gains of 9m (31 December 2010: 9m) were released to the income statement. There was no income deferral during the period (31 December 2010: 1m). At 30 June 2011 total net unrealised gains amounted to 7m (31 December 2010: 16m). Other financial liabilities Customer accounts include certain structured deposits that have embedded derivative features, typically options. Certain inputs to the valuation technique are not based on observable market data but can generally be estimated from historical data or other sources.
39. Capital resources

The Bank's regulatory capital resources at 30 June 2011 consist of both Tier 1 and Tier 2 capital. Tier 1 capital includes equity (comprising ordinary share capital, share premium, capital reserve and other eligible reserves), deductions for intangible assets and prudential adjustments. Prudential adjustments include the reversal of movements on available-for-sale and cash flow hedging reserves. Tier 2 capital includes subordinated debt and collective impairment provisions. Specific prudential limits apply to the amount of subordinated debt and collective provisions eligible as regulatory capital. Total capital is further reduced by supervisory deductions. The regulatory capital resources of the Group include 29.3bn of capital contributed by the Minister for Finance. These contributions restored the levels of Core Tier 1 regulatory capital following losses incurred by the Bank during the past two years. As at 30 June 2011 the Group reported a Tier 1 capital ratio of 12.1% and a Total capital ratio of 13.7%. The level of surplus regulatory capital above the Group's minimum required 8% Total capital ratio at 30 June 2011 is 1.8bn. Regulatory capital ratios have increased since 31 December 2010 due to a reduction in risk weighted assets during the six month period of 5.3bn or 14%. This reduction is primarily related to a reduction in lending assets driven by disposals and repayments, particularly in the UK and US markets. Specific impairment charges incurred in the period also reduced the level of risk weighted assets. Due primarily to the promissory note issued by the Minister for Finance, the Bank has 26bn of exposure to the Irish Government at 30 June 2011. The level of this exposure has reduced since 31 December 2010 mainly due to the transfer of NAMA senior bonds to AIB in February 2011, and payment of the first instalment of the promissory note. Irish Government exposure is risk weighted at 0% in line with the requirements of the Capital Requirements Directive and guidance from the Central Bank of Ireland. The Group adopts the Basel II Standardised Approach in calculating its minimum capital requirements. As at 30 June 2010, the Bank benefited from derogations from certain regulatory capital requirements granted on a temporary basis by the Central Bank of Ireland. These derogations lapsed on 31 August 2010. Therefore the regulatory capital position as at 30 June 2011 and 31 December 2010 does not include any derogations from regulatory capital requirements.
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Regulatory capital 30 June 31 December 2011 2010 m m Without derogations Without derogations Tier 1 capital Equity Prudential filters and regulatory adjustments Non-cumulative preference shares Core Tier 1 capital Perpetual preferred securities Total Tier 1 capital Tier 2 capital Collective provisions Subordinated perpetual debt Subordinated term debt Total Tier 2 capital Tier 1 and Tier 2 capital Capital deductions Total capital Risk weighted assets (g) (f) (d) (e) (e) 392 116 508 4,317 (12) 4,305 31,375 458 125 583 4,575 (12) 4,563 36,668 1,326 52 1,609 2,987 10,261 (12) 10,249 62,620 (c) (a) (b) 3,404 76 329 3,809 3,809 3,535 111 346 3,992 3,992 6,526 106 364 6,996 278 7,274 30 June 2010 m With derogations
Tier 1 capital ratio Total capital ratio
12.1% 13.7%
10.9% 12.4%
11.6% 16.4%
(a) The level of Core Tier 1 capital is impacted by the losses incurred during the period to 30 June 2011. (b) Prudential filters and regulatory adjustments primarily comprise the reversal of movements on available-for-sale and cash flow hedging reserves and the deduction of intangible assets. (c) In December 2010, the holders of the Bank's remaining perpetual preferred securities voted to insert a call option, which the Bank exercised in March 2011. These instruments did not therefore qualify as regulatory capital at 31 December 2010. (d) The maximum amount of collective provisions eligible as Tier 2 capital is limited to 1.25% of risk weighted assets. Accordingly, the amount of eligible collective provisions at 30 June 2010 has reduced in line with the reduction in risk weighted assets. (e) During November and December 2010, the Bank successfully executed a liability management exercise whereby the majority of Tier 2 subordinated debt was bought back at a significant discount to par. (f) On 30 November 2010, the Central Bank of Ireland confirmed that the Bank was no longer required to make a deduction of 169m from Total Own Funds. (g) Risk weighted assets are calculated in line with the Standardised Approach to Basel II which the Bank has adopted since 1 January 2008. The level of risk weighted assets has reduced during the period primarily due to a number of material loan sales in the UK and US markets as well as the targeted client asset disposals and repayments across loan portfolios.
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39. Capital resources continued

Derogations from regulatory capital requirements The Banks regulatory capital position as at 30 June 2010 benefited from the following derogations from certain regulatory capital requirements granted, following requests from the Bank, on a temporary basis by the Central Bank of Ireland. These derogations lapsed on 31 August 2010. That the Bank's minimum Total capital ratio be reduced from 9.5% to 8.0%; That Tier 1 capital comprises at least 50% of the Bank's regulatory capital; That lower Tier 2 capital cannot exceed 50% of Tier 1 capital; That Core Tier 1 capital must be, at a minimum, 4% of risk weighted assets; That collective provisions included in Tier 2 capital cannot exceed 1.25% of risk weighted assets; To apply a risk weight of 150% to certain Irish commercial property loans advanced prior to 31 October 2009; and To deduct 169m from Total capital.
Full details of the Central Bank of Ireland's derogations applicable until 31 August 2010 are as follows: (1) The minimum total capital requirement for credit institutions is 8% as set down by Regulation 19 of the European Communities (Capital Adequacy of Credit Institutions) Regulations 2006 (SI No. 661 of 2006) (the 'CRD Regulations'). The Central Bank of Ireland has imposed a higher minimum total capital ratio requirement of 9.5% on the Bank. This requirement shall be reduced from 9.5% to 8%. (2) Under Regulation 11(6) of the CRD Regulations the Bank is authorised to exceed the limits set out in Regulation 11(1). (3) The Central Bank of Ireland's requirements in relation to Own Funds as set out in paragraph 3.2.1 (i) and (ii) of BSD S 1/04, Notice to Credit Institutions (Alternative Capital Instruments: Eligibility as Tier 1 Capital) shall not apply to the Bank. (4) In accordance with the national discretion provisions afforded to member states under Annex VI of the Capital Requirements Directive 2006/48/EC the Central Bank of Ireland imposed a risk weighting of 150% to speculative commercial real estate with effect from 1 January 2007. This is as set out in paragraph 2.2, Type A Discretions (ref 20) of the Central Bank of Ireland's notice on Implementation of the CRD (28 December 2006) (the 'Implementation Notice'). This shall be amended in the case of the Bank to 100% in respect of the value of all exposures as at 31 October 2009 meeting the definition of speculative commercial real estate as defined in the Implementation Notice. Any increase in such exposures after that date or any new exposures arising after that date meeting the definition of speculative commercial real estate shall continue to have a risk weighting of 150%. (5) The Central Bank of Ireland has in place a restriction on the level of general provisions that may be included in Tier 2 of 1.25% of risk weighted assets, as set forth in Paragraph 2.2 (iv) of the Central Bank of Ireland's notice BSD S 1/00. This limit of 1.25% shall not apply to the Bank. (6) The Central Bank of Ireland grants a waiver from the requirement, set out in its letter of 25 July 2008, to make a deduction of 169m from Total Own Funds.
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40. Related party transactions

Other than as outlined in this Interim Report there have been no related party transactions in the six months ended 30 June 2011 which have materially affected the Groups financial position or performance or which were not of a similar nature to those described on pages 155 to 160 of the 2010 Annual Report and Accounts. Irish Government Parties are considered to be related if one party has the ability to control, or exercise significant influence over, another party's financial or operational decision making, or when both parties are under common control. During the period ended 31 December 2009 the Group was taken into State ownership and, as a result, the Irish Government is considered a related party. CISA, enacted on 21 December 2010, provides the legislative basis for the reorganisation and restructuring of the banking system agreed in the joint EU/IMF Programme of Financial Support for Ireland. It will facilitate the planned restructuring of the Bank as set out in the programme agreement and consistent with EU State Aid requirements. The Irish Government and the Troika (IMF, EU and European Central Bank) may therefore exert significant influence which could impact the Group's future results and financial condition. The Government, under the ELG Scheme, has provided guarantees in respect of certain liabilities of the Group. Fees payable under the ELG scheme are set out in note 2. On 8 February 2011 the Direction Order was made by the Irish High Court directing the Bank to begin a process, managed by the NTMA, to transfer certain deposits and assets held by the Bank. Subsequently on 24 February 2011 the AIB Transfer Order was made by the Irish High Court, under which, in return for transferring its Irish and UK deposits, the Bank was required to pay AIB and AIB UK 1.6bn in excess of book value. In addition the Bank's shareholding in its Isle of Man deposit taking subsidiary was transferred to AIB at approximately net asset value. The total net loss on disposal before tax arising from the transaction in 2011, including the transfer of NAMA senior bonds, is 0.2bn. From 24 February 2011 the legal effect of the AIB Transfer Order is that the vast majority of customer deposit accounts held with the Bank's Irish branches are now held with AIB and in the case of the UK are now held with its subsidiary, AIB UK. Under the terms of the AIB Transfer Order, certain employees of the Bank associated with the deposit business automatically transferred to AIB and AIB UK. The Bank is providing certain administrative and operational services to AIB and AIB UK following the deposit transfer pursuant to the TSA and has earned fee income of 1m during the period in respect of these services. In the current period the Bank has recognised a reduction of 601m in the overall loss on disposal of assets to NAMA (note 11). This primarily results from net positive valuation adjustments following the completion of further due diligence on loans transferred during November and December 2010, the settlement by NAMA of underpayments on a number of loans that transferred during 2010, and the recognition of a receivable in respect of the virtually certain portion of future valuation adjustments yet to be settled by NAMA. In addition, the Bank earned asset management fee income of 11m from NAMA during the period. In March and April 2011 the Bank entered into two cross currency swaps with the NTMA on market terms. The principal amounts of the swaps were 2.3bn / $3.2bn and 0.6bn / 0.6bn respectively and these amounts were exchanged between the parties. The Bank paid the euro principal amounts to the NTMA in return for the receipt of US dollars and sterling. The swaps have amortising profiles and contractual maturities of 2021. The interest rates on the swaps are market-based plus an agreed spread above the 3 month interbank benchmark rate. The swaps assist the Bank in meeting its foreign currency funding requirements. At 30 June 2011, the Bank held a promissory note issued by the Minister for Finance with a carrying value of 23.8bn (note 22). The promissory note pays 10% of the initial principal amount each year commencing on 31 March 2011. The Bank received the first instalment payment of 2.53bn on 31 March 2011. Interest income earned on the promissory note is detailed in note 2. As part of the Direction Order the Bank was also directed to formulate detailed steps plans in respect of the Banks combination with INBS, the rationalisation and, where appropriate, closure of the Banks branches in Vienna, Dusseldorf and Jersey, and its UK offices and the disposal of the Banks Wealth Management business. Those steps plans were, in accordance with the Direction Order, submitted to the NTMA on 31 March 2011. On 7 April 2011, the Minister for Finance issued certain requirements under Section 50 of CISA pursuant to which the Bank was required to implement, subject to the prior approval of the NTMA, high level steps plans appended thereto based on the steps plans submitted to the NTMA in accordance with the Direction Order. Further, the Bank was required to draw up, in conjunction with INBS and the NTMA and, subject to the prior approval of the NTMA, implement, subject to any variations directed by the EC, a high level restructuring and work out steps plan for the Bank and INBS based on the Restructuring Plan (the High Level Steps Plan). The Bank is proceeding to implement the High Level Steps Plan, following its approval by the NTMA on 20 June 2011.
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40. Related party transactions continued

Irish Government continued Placings with, and deposits from, the Central Bank of Ireland are detailed in notes 15, 18 and 25. In addition, in the normal course of business and on arm's length terms, the Group has entered into transactions with Government-related entities, which include financial institutions in which the State has significant influence. The principal transactions include taking and placing deposits, and investing in Government bonds and debt securities in issue. At 30 June 2011 normal banking transactions outstanding between the Group and such entities amounted to: deposits of 38m (31 December 2010: 540m), Government bonds of 275m (31 December 2010: 278m), debt securities issued by State owned financial institutions of 468m (31 December 2010: 383m) and deposits placed of 115m (31 December 2010: 365m). The volume and diversity of other non-banking transactions are not considered significant. Furthermore, while the Irish Government or Government-related entities may in the normal course of their business hold debt securities, subordinated liabilities and other liabilities issued by the Group, it is not practical to ascertain and disclose these amounts. In the ordinary course of business the Group purchases certain utility and other services from entities controlled by the Irish Government. Key management personnel Key management personnel comprise persons who, at any time during the six months ended 30 June 2011, were members of the Board of Directors (the Board) together with the Group Secretary and any other persons having authority and responsibility for planning, directing and controlling the activities of the Bank. None of the current Directors has, or has had at any time during the period, any loans from the Bank. Loans and advances at 30 June 2011 include 1m (31 December 2010: 1m) to two individuals who are currently key management personnel.
41. Events after the reporting period

Irish Nationwide Building Society On 1 July 2011, under powers granted by CISA, the Minister for Finance, in consultation with the Governor of the Central Bank of Ireland, announced the immediate transfer of the assets and liabilities (with the exception of certain limited excluded liabilities) of INBS to the Bank. The transfer took place by way of a transfer order made by the Irish High Court in respect of INBS under Section 34 of CISA. This transfer followed the Direction Order, the requirements issued by the Minister for Finance under Section 50 of CISA on 7 April 2011 and the ECs approval of the Restructuring Plan. The assets and liabilities transferred will be measured on initial recognition in the Annual Report and Accounts for the year ended 31 December 2011 at book value under the principles of predecessor accounting. The financial position of INBS at date of transfer, which has been independently reviewed by their auditors, shows a loan book of approximately 1.9bn and market and central bank funding of approximately 6.6bn. There was no profit or loss associated with this transaction although it is expected to have a positive impact on the Bank's regulatory capital ratios. In addition to the transfer of the assets and liabilities set out above, all employees of INBS transferred to the Bank on 1 July 2011. Loan recovery On 28 April 2011, affiliates of the Bank and Liberty Mutual entered into a joint agreement for the purchase of those assets of Quinn Insurance Limited (Under Administration) ('QIL') representing QIL's marketing and underwriting of insurance policies in the Republic of Ireland. Under the agreement certain transition and other services will also be provided to various other businesses of QIL not being purchased. Liberty Mutual will be the majority owner of the new insurance company and will be responsible for its day to day operation. The Bank will act in a loan recovery capacity only. The completion of the purchase is subject to approval from the relevant Authorities. Legal claims On 27 July 2011 the Commercial Court delivered its decision in the New York Hotel Fund litigation (note 35). The Court found in favour of the Bank against all of the claims made by the lead plaintiff of the litigating investors. In particular the Court held that there was no fraud or negligence or regulatory breach on the part of the Bank. NAMA In July 2011 NAMA informed the Bank that it will not be acquiring 0.9bn of loans which were classified as held for sale at 30 June 2011.
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US loan book sale The Bank has appointed US based advisors to coordinate the sale of the Banks US loan book. The process is proceeding as scheduled and is expected to conclude by the end of the year. A sale of the whole of the US loan book would reduce the Groups gross loan balances by approximately 6.7bn. Wealth Management The Group is examining the potential sale of its Wealth Management business and has received non-binding indicative proposals from various potential acquirers. A number of these prospective purchasers have been invited to further progress their assessment of the business and a subsequent phase of due diligence has since commenced. No final decision however has yet been taken by the Board to dispose of the business and evaluation of the alternative proposals is ongoing. Restructuring Following EC approval of the Restructuring Plan on 29 June 2011, the Bank conducted a review of its operations and, as part of the restructuring process, which will comprise a number of phases, the Bank commenced on 17 August 2011 a 30 day statutory consultation period in respect of a proposed voluntary redundancy scheme. The Bank proposes to achieve a reduction in headcount of up to 350 employees throughout all locations in 2011/2012 through the disposal of the US loan book and the Wealth Management business, the completion of specific projects and the implementation of redundancies across a number of categories of staff in Ireland and in the UK.
42. Approval
The interim financial statements were authorised for issue by the Board of Directors on 25 August 2011.
79
Independent review report to Anglo Irish Bank Corporation Limited

Introduction We have been engaged by Anglo Irish Bank Corporation Limited ('the Bank') to review the condensed set of financial statements in the Interim Report for the six months ended 30 June 2011 which comprise the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated statement of financial position, the Consolidated statement of changes in equity, the Consolidated statement of cash flows and the related notes 1 to 42 (the 'condensed financial statements'). We have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed financial statements. This report is made solely to the Bank in accordance with the International Standard on Review Engagements 2410 (UK and Ireland) 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Bank those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Bank, for our review work, for this report, or for the conclusions we have formed. Our responsibility Our responsibility is to express to the Bank a conclusion on the condensed financial statements in the Interim Report based on our review.
Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom and Ireland. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed financial statements in the Interim Report for the six months ended 30 June 2011 are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union, the Transparency (Directive 2004/109/EC) Regulations 2007 and the Transparency Rules of the Central Bank of Ireland.
Directors responsibilities The Interim Report is the responsibility of, and has been approved by, the Board of Directors of the Bank ('the Directors'). The Directors are responsible for preparing the Interim Report in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007 and the Transparency Rules of the Central Bank of Ireland. As disclosed in note 1, the annual financial statements of the Bank are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed financial statements included in this Interim Report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.
Deloitte & Touche Chartered Accountants 25 August 2011
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www.angloirishbank.com
Anglo Irish Bank Corporation Limited is regulated by the Central Bank of Ireland. In the UK, Anglo Irish Bank Corporation Limited is authorised by the Central Bank of Ireland and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request.

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Interim Report

Six months ended 30 June 2011

Caring for the environment

ANGLO IRISH BANK Interim Report 2011

Forward looking statements

ANGLO IRISH BANK Interim Report 2011

Property price index 170 150 130 110 90 70 50 Dec 04

Ireland IPD All Property US IPD All Property

UK IPD All Property

Employment in Construction '000

Irish trade surplus

Currency 1.5 1.4 1.3 1.2 1.1 1 0.9

Irish trade surplus m

Legacy matters, disclosures and exceptional expenses

Future of the combined entity

ANGLO IRISH BANK Interim Report 2011

Chairmans statement continued

Alan Dukes Chairman 25 August 2011

Group Chief Executives review

ANGLO IRISH BANK Interim Report 2011

Group Chief Executives review continued

A.M.R. (Mike) Aynsley Group Chief Executive 25 August 2011

Customer lending and asset quality

ANGLO IRISH BANK Interim Report 2011

Business review continued

% 19% 1% 14% 34% 14% 52% 100%

% 20% 3% 13% 36% 16% 48% 100%

Business review continued

ANGLO IRISH BANK Interim Report 2011

Business review continued

Income statement - specific lending impairment

6 months ended 30 June 2011 m 773 143 23 939

6 months ended 30 June 2010 m 3,755 459 558 4,772

Year ended 31 December 2010 m 5,813 737 1,089 7,639

Business review continued

ANGLO IRISH BANK Interim Report 2011

Business review continued

Business review continued

ANGLO IRISH BANK Interim Report 2011

Business review continued

Subsequent events and future developments

Risks and uncertainties

Principal risks and uncertainties

Government policy and restructuring risk

General economic conditions

ANGLO IRISH BANK Interim Report 2011

Principal risks and uncertainties continued

Ratings downgrades Bank and Sovereign

Liquidity and funding risk

Principal risks and uncertainties continued

ANGLO IRISH BANK Interim Report 2011

Principal risks and uncertainties continued

Events of default risk

Regulatory compliance risk

Principal risks and uncertainties continued

Fitness and probity regime

Litigation and legal compliance risk

ANGLO IRISH BANK Interim Report 2011

Statement of Directors responsibilities

Consolidated income statement (unaudited)

(104) (1) (105)

ANGLO IRISH BANK Interim Report 2011

Consolidated statement of comprehensive income (unaudited)

(5) (15) 24 (30) (26) (131)