Co-op Bk Hld 29 Regulatory News (93RD)

2020 INTERIM FINANCIAL REPORT

The Co-operative Bank ("the Bank") is pleased to provide an update on its performance in the six months ended 30 June 2020. The full Interim Financial Report, can be found at the following link:

www.co-operativebank.co.uk/investorrelations/financialresults

· Resilient performance on track in a challenging environment

· As anticipated at this point in the turnaround plan, a continued underlying loss in 1H 20: statutory loss before tax £(44.6)m (1H 19: £(38.5)m)

· Supporting our customers through COVID-19: net residential lending of £360m and net SME lending of £136m; with total Core customer asset growth of 2.5% in 1H 20

· More small business customers attracted to the Bank with a 16% share of the incentivised switching scheme

· Continuing to deliver award-winning service through our people with purpose: current account customer satisfaction (NPS) of +25; retained 3rd place in market

· Due to adverse wholesale market conditions for the Bank, and our strong CET1 ratio, we delayed our plans to issue MREL-qualifying debt in 1H 20

· Committed to being compliant with our £550m end-state MREL requirements by January 2022. Next issuance targeted for 2H 20. Although, the potential for a further deterioration in the economic environment creates risk and material uncertainty over our plans to issue MREL to meet future regulatory requirements (as explained in note 1.2)

· Strong CET1 ratio of 18.2% and a low-risk mortgage book with average loan to value of 57%

Andrew Bester, Chief Executive Officer, said,

"I'm proud of the work of all colleagues in providing our customers with the reassurance and financial support they need in these difficult times.

"Whilst we have reported an underlying loss in this period, as expected in our plan, our franchise continues to show resilience, with positive growth in balances and new customer numbers. The significant progress made in transforming the Bank over the last few years means we entered this period of economic uncertainty in a position of resilience, with a strong CET1 ratio, strengthened IT infrastructure, and a low-risk credit book. In addition, our distinct ethical brand is resonating with customers at a time when community and co-operation have rightly had renewed importance for many people.

"However, this is a challenging market for all banks. Given the fall in the base rate to a historic low level in March, we have put in place a number of measures to reduce our operating costs and reprioritise our investment spend. This also means that issuing MREL-qualifying debt, an industry-wide regulatory requirement to build additional capital for the future, remains more challenging at the current time. We delayed our plans to issue MREL in the first half of 2020 due to adverse wholesale market conditions and because our strong CET1 ratio allowed us to do so. Nevertheless, we are committed to achieving our future MREL obligations by January 2022, with the first issuance targeted before the end of this year, and our shareholders continue to be supportive.

"Developing our small business banking service alongside our retail bank remains a priority and I'm delighted with the momentum we've achieved over the period, attracting new customers and a 16% share of the incentivised switching market. We are pleased to have been able to support c.6,000 business customers with Bounce Back loans and CBILS. More widely, customers have increased the deposits they hold with us over the period, and, whilst we supported over 18,000 customers with payment deferrals in the initial period of lockdown, only a small proportion have applied for an extension. All of this is indicative of our low-risk customer base and cautious customer behaviour as they plan ahead.

"Banks will continue to have an important role to play in continuing to keep the economy moving and more widely in supporting the communities around them. I am pleased with how we have played our part in responding to the emerging needs of our customers, in our support for our long-standing charity partners and for 55 small community organisations who perform such vital roles. The values and ethics of the co-operative movement are central to everything we do and we are committed to continuing to support as much as we can as the nation looks to recover from the effects of the pandemic."

PERFORMANCE HIGHLIGHTS

Resilient financial performance with challenges ahead

· Statutory loss before tax £(44.6)m (1H 19: £(38.5)m)

· Underlying loss £(33.9)m (1H 19: £(2.3)m (restated))

· Customer net interest margin 1.41% (1H 19: 1.89% (restated))

· Underlying cost:income ratio 115% (1H 19: 101% (restated))

· Impairment charge of £11.2m primarily due to the impacts COVID-19 (1H 19 impairment charge: £0.1m)

Strong CET1 ratio and liquidity in unprecedented times:

· CET1 ratio of 18.2% (2019: 19.6%)

· Total capital ratio of 22.4% (2019: 23.8%)

· Risk-weighted assets of £5.0bn (2019: £4.8bn)

· LCR of 181.7% (2019: 173.7%), supported by strong deposit growth

Supporting our customers through COVID-19:

· Net residential lending of £360m and net SME lending of £136m; total core customer asset growth of 2.5% in 1H 20

· A range of measures introduced to help customers:

o Over 16,000 mortgage payment deferrals approved by 30 June (c.11% of retail and c.22.6% of Optimum customers); of these customers 98% were up to date with payments in February before COVID-19; average Loan-to-Value of 60%. Currently (i.e. in July) those customers who have requested a second payment deferral account for only 1.8% of our mortgage book, which is c.15% of the initial payment deferral population

o Over 2,700 payment deferrals approved for loans and credit cards by 30 June (c.6.8% of loans book and 0.5% of credit card book)

o First bank to issue £500 authorised overdraft automatically interest free, now provided to over 348,000 customers

· All branches and contact centres are open, with colleagues adapting to serve customers safely

Continuing to deliver award-winning service through our people with purpose:

· Current account customer satisfaction (NPS) of +25; retained 3rd place in the market

· 42% of senior roles held by women

· Colleague engagement score of 82%, supplemented with more recent 'pulse-check' surveys indicating

o 83% of colleagues feel positive about their well-being

o 83% of colleagues prefer working from home

Making a difference in our communities and committed to tackling climate change:

· Supporting our many NHS worker customers, donating headsets to local GPs and care packages to local hospitals

· Working with our charity partner Refuge to support those impacted by domestic and financial abuse during lockdown

· £498k of charitable donations made in the period

· Confirmed signatory of UNEPFI Principles of Responsible Banking from February 2020

· Proud winner of the 'Changing lives in the Community' award at the UK Card & Payments Awards earlier in the year

· Beyond carbon neutral since 2007 and targeting zero waste to landfill by end-2020; we don't provide banking services to businesses involved in fossil fuels production, environmentally harmful chemicals, or unsustainable harvest of natural resources

Outlook

The economic outlook is very uncertain and we expect challenging trading conditions for the foreseeable future. Accordingly, our focus will be to respond to and manage the impact of the economic challenges ahead, successfully issuing MREL resources with the support of our shareholders, and to continue to provide our customers with excellent service, whilst making a difference in our community.

In light of the significant changes in our operating environment, we now expect:

· Customer net interest margin to be c.1.40-1.45% in 2020, with the full year impact of the lower base rate environment in 2021 reducing margins further to c.1.35-1.40% before recovering, targeting c.1.70-1.80% at the end of the plan

· Underlying cost:income ratio of c.110-115% in 2020. In subsequent years, as a result of our ongoing simplification activities, we are targeting a ratio of c.100-105% in 2021 and, as income recovers post-COVID-19, c.65-75% by the end of the plan

· We aim to return to sustainable profitability in 2022 and in the meantime, our CET1 ratio reduces reflecting ongoing losses to c.16-17% in 2020, and c.13.5-14.5% in 2021 which is above regulatory minimum levels. As profitability is returned in 2022, CET1 levels thereafter are targeted to grow to c.19-20% at the end of the plan.

We are committed to being compliant with our end-state MREL requirements. We are targeting the issuance of approximately £550m of MREL-qualifying debt (if base case economic conditions prevail) before the end of 2021, with the first issuance planned to take place before the end of 2020.

The outlook will remain under review until there is more certainty around longer-term COVID-19 impacts. Our strategy drives a return to organic capital generation in 2022; the outlook may be adapted if required over the course of the planning period to preserve this aim

Any previous guidance or forward-looking information provided has been withdrawn.

Income statement - Underlying basis

A reconciliation to the statutory loss before tax is included in note 3 below.

The basis of preparation for the income statement was updated in the second half of 2019 and accordingly the six months ended 30 June has been restated.

Investor enquiries:

investorrelations@co-operativebank.co.ukGary McDermott, Treasurer and Head of Investor Relations: +44 (0) 161 201 7805

Media enquiries:

Lesley McPherson, Director of Communications: +44 (0) 7725 903270David Masters, Lansons: +44 (0) 7825 427514

About The Co-operative Bank

The Co-operative Bank p.l.c. provides a full range of banking products and services to about 3.5m retail and c.85k small and medium sized enterprises ("SME"). The Bank is committed to values and ethics in line with the principles of the co-operative movement. The Co-operative Bank is the only high street bank with a customer-led ethical policy, which gives customers a say in how their money is used. Launched in 1992, the Policy has been updated on five occasions, with new commitments added in January 2015 to cover how the Bank operates its business, products and services, workplace and culture, relationships with suppliers and other stakeholders and campaigning.

The Co-operative Bank p.l.c. is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Co-operative Bank p.l.c. eligible customers are protected by the Financial Services Compensation Scheme in the UK, in accordance with its terms.

Note: all figures contained in this announcement are unaudited. This announcement contains inside information.

Note: this announcement reflects the content included in the Interim Financial Report accessible at:

www.co-operativebank.co.uk/investorrelations/financialresults

All page references given relate to the equivalent page in that Interim Financial Report.

INDEPENDENT REVIEW REPORT TO THE CO-OPERATIVE BANK HOLDINGS LIMITED

Introduction

We have been engaged by the Group to review the condensed set of financial statements in the Interim Financial Report for the six months ended 30 June 2020 which comprises the Condensed Consolidated Income Statement, Condensed Consolidated Statement of Comprehensive Income, Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Cashflows, Consolidated Statement of Changes in Equity and related notes 1 to 17. We have read the other information contained in the Interim Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Group in accordance with guidance contained in 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. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Group, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The Interim Financial Report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Interim Financial Report in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union.

As disclosed in note 1.1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this Interim Financial Report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Group a conclusion on the condensed set of financial statements in the Interim Financial 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. 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 consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Interim Financial Report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union.

Emphasis of matter - going concern

In forming our conclusion on the Interim Financial Report, which is unmodified, we have considered the adequacy of the disclosures made in note 1.2 of the Interim Financial Report concerning the Group's ability to continue as a going concern and the uncertainty surrounding the Group's ability to complete its MREL issuance programme in a reasonable timeframe, should the current unpredictable economic environment continue. Completion of the planned MREL issuance programme is required to maintain compliance with binding regulatory requirements. In light of COVID-19, the Group has updated the 2020 - 2024 multi-year plan ("the Plan") and is forecast to remain compliant with all binding regulatory and liquidity capital requirements during the going concern assessment period, but to temporarily use certain capital buffers, as permitted by the PRA.

The Directors have considered the key risks associated with the successful delivery of the Plan, and their consequential effects, in particular the effect on the Group's ability to maintain compliance with capital requirements as set out in the principal risks and uncertainties disclosures on pages 23 to 27. The Directors consider that the completion of the Group's MREL issuance programme in a reasonable timeframe, should the current unpredictable environment continue, represents a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern.

After making enquiries and considering the current forecasts, in particular those up to 31 July 2021, the Directors have a reasonable expectation that the Group will complete its MREL issuance programme and continue to have adequate resources to continue in business over the going concern period. For these reasons, they continue to adopt the going concern basis of accounting in preparing the Interim Financial Report.

Ernst & Young LLP

London

29 July 2020

CONDENSED CONSOLIDATED INCOME STATEMENT

£million

The results above wholly relate to continuing activities.

The loss for the financial period is wholly attributable to equity shareholders.

The notes on pages 42 to 58 form part of these interim condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

£million

The notes on pages 42 to 58 form part of these interim condensed consolidated financial statements.

CONDENSED CONSOLIDATED BALANCE SHEET

£million

The notes on pages 42 to 58 form part of these interim condensed consolidated financial statements.

Approved by the Board of The Co-operative Bank Holdings Limited on 29 July 2020:

CONDENSED CONSOLIDATED STATEMENT OF CASHFLOWS

£million

RECONCILIATION OF MOVEMENTS OF LIABILITIES TO CASHFLOWS ARISING FROM FINANCING ACTIVITIES

£million

Lease liabilities arise from the adoption of IFRS 16 which came into force in 2019. In 2019, the Group issued Tier 2 debt classified as other borrowed funds on the balance sheet.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

£million

The notes on pages 42 to 58 form part of these interim condensed consolidated financial statements.

SELECTED NOTES TO THE FINANCIAL STATEMENTS

All amounts are stated in £m unless otherwise indicated

1. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES

1.1 Basis of preparation

The Interim Financial Statements for the Group are for the six month period ended 30 June 2020 and are unaudited. The Group Interim Financial Statements have been prepared in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting'.

The Group Interim Financial Statements comprise the consolidated results and position of The Co-operative Bank Holdings Limited (Holding Company) together with its subsidiaries (together, the Group).

1.2 Going concern

These Interim Financial Statements are prepared on a going concern basis. The Directors have a reasonable expectation that the Group will have adequate resources to continue in business for the foreseeable future, taking into account the matters referred to below.

IAS 1 (Presentation of Financial Statements) requires Directors to make an assessment of a company's ability to adopt the going concern basis of accounting in the future. IAS 1 states that the information should cover at least 12 months from the end of the reporting period but not be limited to that period. Financial Reporting Council (FRC) guidelines state that the information should consider a period of at least 12 months from the date the financial statements are authorised for issue. When considering the going concern status of the Group, the Directors have referenced the FRC published guidance on the going concern Basis of Accounting and Reporting on Solvency and Liquidity Risks (the 2016 Guidance).

Whilst the UK government introduced measures partially mitigating the impact of COVID-19, the pandemic has resulted in a significant UK recession in the first half of 2020 and unprecedented economic uncertainty in the short-to-medium-term. In light of COVID-19, the Group has updated its 2020-2024 multi-year plan (the 'Plan').

The Group is forecast to remain compliant with all binding regulatory liquidity and capital requirements during the going concern assessment period but to temporarily use certain capital buffers, as permitted by the PRA.

The Board of Directors have used the updated Plan as the basis of its assessment in evaluating whether adopting the going concern basis of accounting is appropriate, and noting further, more pessimistic scenarios that could reasonably possibly occur. This assessment included a detailed review of the ability to secure a further commitment of MREL-qualifying resources, projected profitability, forecast financial, liquidity positions and capital adequacy ratios, other regulatory capital considerations, and operational risks associated with the COVID-19 pandemic.

The key risks associated with successful delivery of the Plan include:

· Macroeconomic environment - Heightened uncertainty as to expected credit losses due to the COVID-19 stress and uncertainty related to the UK's withdrawal from the European Union;

· Net interest margin (NIM) - The amount and timing of future changes to the Bank of England base rate following the COVID-19 base rate cuts;

· Return to profitability - The ability to deliver to the multi-year forecast is heavily influenced by external factors; and

· Regulatory requirements - Future increases in regulatory capital requirements, which require additional capital resources in the form of MREL-qualifying resources to remain compliant and avoid regulatory forbearance.

The Directors have considered the risks set out above and their consequential effects, in particular the effect on the Group's ability to maintain compliance with capital requirements within the principal risks and uncertainties disclosed on pages 23 to 27. The Directors consider that the completion of the Group's MREL issuance programme in a reasonable timeframe, should the current unpredictable environment continue, represents a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern. Nevertheless, after making careful enquiries and considering the current forecasts, in particular those up to 31 July 2021, the Directors have a reasonable expectation that the Group will complete its MREL issuance programme and continue to have adequate resources to continue in business over this period. For these reasons, they continue to adopt the going concern basis in preparing these Interim Financial Statements. This set of Interim Financial Statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

1.3 Significant accounting policies

The accounting policies, presentation and methods of computation are consistent with those applied by the Group in its audited 2019 Annual Financial Statements, which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).

1.4 Standards and interpretations issued

Information on pronouncements that will be relevant in future periods is provided in the 2019 Annual Report and Accounts.

2. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

The preparation of financial information requires management to make judgements and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Assumptions and estimates are reviewed on an ongoing basis. The critical judgements and estimates of the Group are as set out within the 2019 Annual Report and Accounts. Except as noted below, the accounting policies, presentation and methods of computation of critical accounting judgements and key sources of estimation uncertainty are consistent with those applied by the Group in the 2019 Annual Report and Accounts.

2.1 Loan impairment provisions

The COVID-19 pandemic has introduced unprecedented economic uncertainty which requires the application of a significant degree of expert economic and credit risk judgement. The key COVID-19 related assumptions and judgements that were applied in the determination of ECL at 30 June 2020 are listed below.

Model assumptions:

· Economic scenarios - At 31 December 2019, five economic scenarios were reflected within the impairment models. Following the comprehensive review of economic outlook as a result of COVID-19, it was concluded that four scenarios adequately reflect a range of possible outcomes at 30 June 2020. Each scenario reflects a COVID-19-specific outlook of differing severity, with the base scenario reflecting the most likely economic forecast and aligned with the central scenario used for financial planning purposes described in the update to capital risk on pages 24-26. The scenario weightings were also updated at 30 June 2020 to reflect the nature of each scenario.

Five-year average GDP and consumption are higher in the base than in the upside, where both scenarios assume a strong V-shaped recovery from differing initial shocks. Our upside scenario sees GDP decline 13% peak to trough in 2020, compared to a 27% decline in the base. Both these scenarios then assume a V-shaped recovery from this initial decline and as such five-year average growth is higher in the base than the upside because the recovery required to sustain the V is larger.

The table below shows how ECL would change if the weighting applied to the 30 June 2020 scenarios had been mild upside 0%, base 50%, mild downside 35% and downside 15%.

The above sensitivities reflect the impacts on both the modelled ECL and the dynamic PMAs in place at 30 June 2020. Corporate/SME sensitivities exclude Stage 3 individually assessed impairment provisions.

· Retail - Customers receiving COVID-19-related concessions are not automatically classified as having evidenced a significant increase in credit risk (SICR). Such customers are moved to stage 2 if they meet other SICR criteria (see note 2 to the 2019 Group Annual Report and Accounts for SICR criteria). Further, COVID-19-related payment deferrals do not count towards the backstop days past due stage 2 and 3 transfer criteria.

· SME and corporate - Existing credit exposures with SME and corporate customers who have requested Coronavirus Business Interruption Loans (CBILS) and Bounce-Back loans have been considered on a case-by-case basis. If the evidence shows that the request is solely COVID-19-driven, such cases are not classified as having evidenced a significant increase in credit risk (SICR). Where there is evidence which shows that the request is not solely COVID-19-driven, it is classified as SICR, and the existing exposure is transferred to stage 2. CBILS and Bounce-Back loans are not classified as POCIs on origination.

Post-model assumptions reflect:

1. the proportion of customers receiving COVID-19-related concessions moving into arrears;

2. the outlook for certain business sectors which are more exposed to the economic impact of COVID-19; and

3. potential risk factors associated with specific segments of the portfolio. Post-model adjustments have been reflected for a proportion of customers receiving COVID-19-related concessions moving into arrears, and certain SME and corporate higher risk sectors and segments.

Certain PMAs applied to the SME/corporate portfolio modify down the modelled impacts on certain segments of the book where the Group has exposures to low-risk public sector lending or industry segments where the beneficial impacts of government intervention are not fully captured in the modelled outputs.

2.2 Conduct and legal provision

The Group has finished processing the vast majority of all Payment Protection Insurance (PPI) enquiries and complaints received prior to the time-bar in August 2019. The main outstanding element relates to the cohort of complaints submitted by the Official Receiver which remains under discussion, and the Group continues to hold provision against redress offers made, most of which are expected to be settled within the second half of 2020.

3. SEGMENTAL INFORMATION

The Group provides a wide range of banking services within the UK. The Executive Committee (ExCo) has been determined to be the chief operating decision-maker of the Group. The Group's operating segments reflect it's organisational and management structures in place at the reporting date. ExCo reviews information from internal reporting based on these segments in order to assess performance and allocate resources. The segments are differentiated by whether the customers are individuals or corporate entities. The Group has identified three segments: Retail Banking, SME Business Banking and Treasury as part of its core business. During the second half of 2019, the definition of underlying was updated and accordingly the 2019 presentation below has been updated. More information is included on page 8 of the Chief Executive's review. The presentation is consistent with that set out within the 2019 Annual Report and Accounts.

The re-allocation of costs and income reported in underlying loss is shown below:

The table below represents the reconciliation of the underlying basis and the segmental note to the consolidated income statement. The underlying basis is the basis on which information is presented to the chief operating decision-maker and excludes the items below which are included in the statutory results.

1. In the period ended 30 June 2020, this comprises the revaluation gain on equity shares.

2. In the period ended 30 June 2020, this comprises loss on asset sales.

1. In the period ended 30 June 2019, this comprises the impact of the revaluation of the Surrendered Loss Debtor (£7.8m) and the revaluation gain on equity shares (£8.1m).

2. In the period ended 30 June 2019, this comprises the gain on sale of shares.

The table below represents the segmental analysis of assets and liabilities.

4. NET INTEREST INCOME

Interest income and similar income

Interest expense and similar charges

5. OTHER OPERATING INCOME (NET)

1. Income from assets and liabilities held at fair value through profit or loss of £3.6m (30 June 2019: £16.4m) includes £nil gain on the Surrendered Loss Debtor (30 June 2019: £7.8m) and £4.2m gain on equity shares (30 June 2019: £8.1m).

6. OPERATING EXPENSES

1. Mainly comprises amortisation of intangible assets.

7. INCOME TAX

In addition to the above, included within other comprehensive income is a deferred tax charge of £33.6m (2019: £9.2m).

The tax on the loss before taxation differs from the theoretical amount that would arise using the corporation tax rate in the UK as follows:

Deferred tax assets totalling £453.0m (2019: £374.8m) have not been recognised where doubt exists over the availability of sufficient future taxable profits.

8. LOANS AND ADVANCES TO CUSTOMERS

Analysis of the balance sheet

Loans and advances to customers include £142.2m (31 December 2019: £143.2m) of financial assets designated at fair value through profit or loss to eliminate or significantly reduce a measurement or recognition inconsistency; of these, £59.5m (31 December 2019: £60.7m) are secured by real estate collateral. Exposure is predominantly within the UK.

For stage allocation and analysis, including the impact which the COVID-19 pandemic has had on the impairment losses for the period, please refer to the credit risk section of the risk management report.

Analysis of allowance for impairment losses

1. Includes repayments (other than those related to assets which transitioned during the period) and changes due to other model inputs.

Analysis of income statement

9. INVESTMENT SECURITIES

Analysis of investment securities

1. Investment securities were net of impairment in both periods.

Movement in investment securities

Included in investment securities are repurchase receivables of £458.6m. Certain investment securities have been pledged by the Group; see note 13 for further details on encumbered and pledged assets.

Analysis of investment securities by issuer

Other floating rate notes (FRNs) are Sterling denominated, with contractual maturities ranging from six months to seven years from the balance sheet date.

10. OTHER BORROWED FUNDS

On 25 April 2019, the Group issued £200.0m Fixed Rate Reset Callable Subordinated Tier 2 Notes (Tier 2 Notes) which:

· Are unsecured, subordinated, obligations of the Group, ranking pari passu without any preference among themselves and pari passu with other obligations of the Group which constitute Tier 2 capital of the Issuer on a winding-up;

· Have a contractual maturity of 25 April 2029, an optional call date of 25 April 2024 and a coupon of 9.5%; and

· Are listed on the London Stock Exchange.

The debt recorded in the balance sheet includes incremental, directly attributable transaction costs, accrued interest and the fair value adjustment for hedged risk.

11. PROVISIONS

Property

The Group has a number of leasehold properties available for rent. Provisions are made when either the sub-lease income does not cover the rental expense or the property is vacant. The provision is based on the expected outflows during the remaining periods of the leases. In addition, dilapidation provisions are recorded to the extent that the Group has incurred dilapidations and/or the dilapidation clause within the contract has been invoked.

Payment Protection Insurance (PPI)

Provisions have been made in respect of potential customer compensation claims relating to past sales of PPI. Claims are investigated on an individual basis and, where appropriate, compensation payments are made. For a number of years the Group, along with many other financial services providers, sold PPI alongside mortgage and non-mortgage credit products. The Group stopped selling non-mortgage PPI in January 2009 and stopped selling mortgage PPI in March 2012. The total amount recognised to date for costs related to the historical selling of PPI is £600.3m.

The Group has finished processing the vast majority of all enquiries and complaints received prior to the time-bar in August 2019. The main outstanding element relates to the cohort of complaints submitted by the Official Receiver which remains under discussion, and the Group continues to hold provision against redress offers made, most of which are expected to be settled within the second half of 2020.

Whilst a significant amount of estimation uncertainty has been extinguished, there remains some uncertainty around the timing and quantum of the acceptance and settlement of offers that would see the remainder of the provision fully utilised, as well as the outcome of the Group's discussions with the Official Receiver.

Conduct/legal provisions

The Group provided £0.2m in the six months period to 30 June 2020 in relation to potential litigation claims (30 June 2019: £0.7m).

Other

Other provisions include a net charge of £0.3m (30 June 2019: £5.7m) which mainly comprises movements in the provisions for employee variable pay and severance costs during the period.

12. RETIREMENT BENEFITS

Details of the pension schemes operated by the Group are provided in the 2019 Annual Report and Accounts. The amounts recognised in the balance sheet in relation to defined benefit schemes are as follows:

The present value of the defined benefit obligation as at 30 June 2020 has been derived using assumptions that are consistent with those used for the 31 December 2019 value, updated for market conditions at the interim reporting date. Corporate bond yields have decreased over the first half of 2020, which has the effect of decreasing the discount rate and increasing liabilities. As a result of the hedging techniques employed within the schemes' investment strategies, which are calibrated to hedge the liabilities on the more prudent funding basis, together with changes in corporate credit spreads, this increase in liabilities has been more than offset by a corresponding increase in assets. The improvement in the net asset position further reflects £0.7m of employer contributions paid into BPS during the period.

During the first half of 2020, the Pace Trustee completed a £400 million pension insurance buy-in, covering liabilities for c.2,000 pensioner members in the Bank Section of the Pace Scheme. This transaction has been reflected in the retirement benefit net surplus at 30 June 2020 and had the impact of a reduction of c.£93m.

13. CONTINGENT LIABILITIES, CONTRACTUAL COMMITMENTS AND GUARANTEES

The tables below provide the contractual amounts of contingent liabilities and commitments. The contractual amounts indicate the volume of business outstanding at the balance sheet date and do not represent amounts at risk.

1. Undrawn loan commitments include revocable commitments which are unused credit card limits of £1,032.3m (31 December 2019: £1,005.1m).

Other contingent liabilities, contractual commitments and guarantees

There have been no significant changes to the position of the Group's other contingent liabilities, contractual commitments and guarantees as disclosed in the 2019 Annual Report and Accounts.

Encumbered and pledged assets

a) Assets pledged under repurchase agreements with other banks including the Bank of England

Assets are pledged as collateral under repurchase agreements with other banks including the Bank of England. The associated deposits which are included within deposits by banks and cash and balances with central banks, are not available to finance day-to-day operations.

b) Other assets transferred but not derecognised

Included within loans and advances to customers are £3,178.8m (31 December 2019: £3,198.4m) of balances pledged across the Group's securitisation and covered bond activities. The Group retains exposure to substantially all of the risks and rewards of ownership of these assets and they remain on the Group's balance sheet. Secured on these mortgage assets are £849.3m (31 December 2019: £849.0m) of fixed and floating rate notes. The carrying value of these notes excludes retained securitisation notes totalling £1,582.7m (31 December 2019: £1,675.9m).

c) Assets pledged under the Term Funding Scheme (TFS)

Investment securities and mortgage assets with a carrying value of £975.0m (31 December 2019: £1,112.7m) have been collateralised against the Group's TFS drawdowns.

d) Assets pledged under the Group's pension arrangements

The Group has arrangements with its pension schemes whereby it provides contingent security, where such assets would only be accessed by the trustees in the event that the Group was unable to meet future contribution obligations, as agreed with the relevant trustee, insolvency or the failure to adhere to the terms of the security deeds. The encumbered assets comprise of AAA Silk Road Four and Silk Road Five securitisation notes and cash generated from the amortisation of the notes, which can be substituted for further investment securities.

At 30 June 2020 the Group had pledged £163.9m of notes and £10.8m cash to the Britannia Pension Scheme, and £236.4m of notes and £5.7m cash to the Pace scheme. A further £12.5m in cash was held in custody for the benefit of the Pace scheme in lieu of deficit recovery contributions.

e) Other collateralised assets

Cash and investment securities totalling £322.8m (31 December 2019: £229.8m) and £93.0m (31 December 2019: £97.5m) respectively were collateralised under interest rate swap arrangements.

The Group also places cash and investment security collateral in support of transactions with banking payment system operators.

f) Bank of England Mandatory Reserve

Mandatory reserve deposits are also held with the Bank of England in accordance with statutory requirements.

Contingent assets

Refund of ATM business rates following Supreme Court judgement

Historically, the Group owned a large number of Automatic Teller Machines (ATMs), a significant number of which were located within retail stores owned by the Co-op Group during a period when the Group and the Co-op Group were part of the same corporate group and for a number of years thereafter. The Bank sold the ATMs in 2014.

In 2013, the Valuation Office Agency, which is part of HMRC and compiles the business rates list for England, Scotland and Wales, determined that externally facing ATMs should be separately assessed for business rates in addition to store business rates already incurred by retailers, and this was applied with effect from April 2010. The additional rates due on the ATMs under these rules were paid by the Bank to the Co-op Group, who in turn paid the store and ATM rates to the relevant local billing authorities. Retailers, including the Co-op Group, successfully challenged the assessment, culminating in a Supreme Court decision in May 2020 ruling that externally facing ATMs form part of the stores offering and should not be subject to additional business rates.

As a result of the ruling, it is expected that the Valuation Office Agency will update the business rates list accordingly via settling the outstanding appeals. Once the rating list is updated the local billing authorities will then start to process these amendments in order for refunds of historic business rates that were paid for external ATMs to be recovered. It is not yet practicable to estimate the financial effect of the Supreme Court judgement on the Group's results and the Group continues to work through its estimation of monies to be received from the Co-op Group under this arrangement and the Group's share of associated professional services fees.

Unconsolidated structured entities

Details of the interests in unconsolidated structured entities are disclosed in note 36 of the 2019 Annual Report and Accounts. There has been no significant change in the nature of the transactions in these entities except for exercise of the Warwick Finance Two call option in June 2020. At the call option date, the Group's remaining interest in this unconsolidated structured entity related solely to the holding of legal title of mortgages previously sold by the Group to Warwick 2.

The Group has entered into an agreement to continue to hold and provide legal title services on commercial terms following the Warwick Finance Two call.

14. RELATED PARTY TRANSACTIONS

There were no changes to the nature of the related party transactions during the period to 30 June 2020 other than those disclosed in note 32 of the 2019 Annual Report and Accounts that would materially affect the position or performance of the Group.

15. SHARE CAPITAL

There are 9,029,130,200 A shares (2019: 9,029,130,200) and 83 B shares (2019: 83) in The Co-operative Bank Holdings Limited. The holders of the ordinary A shares do not hold any voting rights but are entitled to participate in distributions and to receive a dividend on liquidation. The B shareholders have one vote for every share held and also benefit from certain governance, notification and approval rights with respect to the Holding Company, but have no rights to distributions, other than on exit in an amount of £25.0m in aggregate, subject to achieving a minimum valuation threshold.

16. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

The methodology and assumptions for determining the fair value of financial assets and liabilities are consistent with those disclosed in the 2019 Annual Report and Accounts.

Balance sheet classification and measurement category

The tables below analyse the balance sheet carrying values of financial assets and liabilities by classification.

1. Other assets include settlement funds, which at 30 June 2020 is a credit balance of £5.5m.

All other balance sheet categories represent non-financial assets and liabilities.

1. Other assets include settlement funds, which at 31 December 2019 is a credit balance of £1.4m.

Valuation of financial assets and liabilities measured at fair value

The carrying values of financial assets and liabilities measured at fair value are analysed in the following tables by the three level fair value hierarchy defined as follows:

· Level 1 - Quoted market prices in active markets;

· Level 2 - Valuation techniques using observable inputs;

· Level 3 - Valuation techniques using unobservable inputs.

Key elements of the valuation techniques, inputs and assumptions used in measuring the fair value of level 3 financial assets are as follows:

· Investment securities

Investment securities comprise RMBS of £63.8m (FVOCI) and £3.6m (FVTPL - mandatorily measured) as at 30 June 2020 (31 December 2019: £69.9m FVOCI and £4.2m FVTPL). An independent third-party valuation agent is used to provide prices for the rated RMBS obtained from large financial institutions. These prices are indicative values only and do not represent an offer to purchase the securities. These RMBS represent the Group's interests in unconsolidated structured entities. A 1% increase or decrease in the price of the notes will result in the value increasing or decreasing by approximately £0.7m respectively as at 30 June 2020.

· Equity shares

Equity shares comprise US Dollar denominated convertible preference shares in Visa International, which are classified as FVTPL - designated, with any movements in fair value being recognised in the income statement. The fair value of the Visa International shares has been calculated by taking the period-end NYSE share price and discounting for illiquidity and clawback. If the illiquidity discount was increased by a relative 10%, it would result in a reduction in the overall fair value of the equity shares of £2.3m (5%) as at 30 June 2020.

· Other assets

Other assets comprise the Surrendered Loss Debtor of £47.8m as at 30 June 2020 (31 December 2019: £47.8m). The fair value was determined by discounting the expected cash flows under the terms of the agreement with the Co-op Group. Cash flows are discounted at a discount rate reflecting the yield of the longest maturity Co-op Group bond in issue (adjusted to reflect the weighted average maturity of cash flows due from the Co-op Group), plus a premium to estimate the uncertainties associated with the matters set out in note 2.2.5 to the Group 2019 Annual Report and Accounts. The premium is calculated applying risk parameter estimation theory using observable inputs from related (but not identical) financial instruments or indices.

If the illiquidity adjustment was assumed to be 10% higher on a relative basis, this would not result in a material change in the value of the Surrendered Loss Debtor.

Movements in fair values of instruments with significant unobservable inputs (level 3) were:

Fair values of financial assets and liabilities not carried at fair value

The carrying values of financial assets and liabilities measured at amortised cost are analysed in the following tables by the three level fair value hierarchy set out above.