2011 Bos Ra

Bank of Scotland plc
Report and Accounts

2011
Member of Lloyds Banking Group
Contents
Directors’ report 2
Directors 6
Forward looking statements 7
Principal risks and uncertainties 8
Independent auditors’ report 15
Consolidated income statement 17
Statements of comprehensive income 18
Balance sheets 19
Statements of changes in equity 21
Cash flow statements 23
Notes to the accounts 24

Directors’ report
Results
The consolidated income statement on page 17 shows a loss attributable to equity shareholders for the year ended 31 December
2011 of £3,105 million.
Principal activities
Bank of Scotland plc (the Bank) and its subsidiary undertakings (the Group) provide a wide range of banking and financial services
through branches and offices in the UK and overseas.
The Group’s revenue is earned through interest and fees on a broad range of financial services products including current and
savings accounts, personal loans, credit cards and mortgages within the retail market; loans and capital market products to
commercial, corporate and asset finance customers; and private banking.
Business review
The Group’s loss before tax decreased by £410 million, or 11 per cent, to £3,461 million for 2011 from £3,871 million in 2010.
The trading surplus decreased by £3,527 million, or 49 per cent, from £7,143 million to £3,616 million, comprising a £968 million
decrease in net interest income, a £2,743 million decrease in other income and a £184 million reduction in operating expenses.
Net interest income was £968 million, or 11 per cent, lower at £7,857 million for 2011, compared to £8,825 million for 2010,
principally due to a reduction in margins as a result of increased funding costs.
Other income declined by £2,743 million from £3,480 million in 2010 to £737 million in 2011, as a result of reduced net trading
income following unfavourable market conditions, the non-repetition of liability management gains of £433 million arising in
2010 and a decrease in operating lease income following reductions in operating lease assets.
Total operating expenses decreased to £4,978 million in 2011, compared to £5,162 million in 2010. The decrease reflects
integration savings, the non-recurrence of a provision of £500 million for customer goodwill payments in 2010 and lower
depreciation and amortisation charges, largely as a result of reductions in operating lease assets, offset by a £1,155 million charge
in respect of payment protection insurance in 2011.
A reduction of £3,822 million in impairment losses, from £10,926 million in 2010 to £7,104 million in the current year, arises
from continued improving business quality and portfolio trends resulting from the Group’s prudent risk appetite, together with a
significant reduction in impairment losses incurred by the Group’s international businesses.
Total assets at 31 December 2011 were £558,143 million, £15,651 million, or 3 per cent, lower compared to £573,794 million
at 31 December 2010, reflecting the continuing disposal of assets which are outside of the Group’s risk appetite, customer
deleveraging and de-risking and subdued demand in lending markets.
Debt securities in issue decreased by £25,272 million, or 25 per cent, to £75,449 million compared to £100,721 million at
31 December 2010 as funding requirements decreased in line with reductions in asset balances, reflecting the strategy of
disposing of exposures outside of the Group’s risk appetite.
Shareholders’ equity decreased by £1,445 million, from £19,842 million to £18,397 million at 31 December 2011, reflecting
the loss for the year, offset by gains on cash flow hedges.
The Group’s total capital ratio at 31 December 2011 improved to 14.9 per cent from to 13.9 per cent at 31 December 2010.
During the year, risk-weighted assets were reduced by £51,349 million, or 20 per cent, from £250,598 million to £199,249 million
at 31 December 2011.
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Directors’ report
Financial risk management objectives and policies

Information regarding the financial risk management objectives and policies of the Group, in relation to the use of financial
instruments, is given in note 46 on page 81. A discussion of the principal risks and uncertainties faced by the Group is set out on
pages 8 to 14. This information is incorporated into this report by reference. Additional information can be found in the annual
report of Lloyds Banking Group plc, the Bank’s ultimate parent, which does not form part of this report.
Going concern
The going concern of the Bank and the Group is dependent on successfully funding their respective balance sheets and maintaining
adequate levels of capital. In order to satisfy themselves that the Bank and the Group have adequate resources to continue to
operate for the foreseeable future, the directors have considered a number of key dependencies as discussed in note 1 on page 24
and additionally have considered projections for the Group’s capital and funding position. Having considered these, the directors
consider that it is appropriate to continue to adopt the going concern basis in preparing the accounts.
Directors
The names of the directors of the Bank are shown on page 6. Changes to the composition of the Board since 1 January 2011 up
to the date of this report are shown below:
Joined the Board Retired from the Board
Mr A Horta-Osório (became Group Chief Executive on 1 March 2011) 17 January 2011
Mr J E Daniels 28 February 2011
Mr A G Kane 18 May 2011
Mrs H A Weir 18 May 2011
Ms S V Weller 1 February 2012
Mr G T Tate 6 February 2012
Mr T J W Tookey, Lord Leitch and Sir Julian Horn-Smith will retire from the Board on 24 February, 29 February and 17 May 2012.
respectively.
Directors’ interests
The directors are also directors of Lloyds Banking Group plc and their interests in shares in Lloyds Banking Group plc are shown
in the report and accounts of that company.
Directors’ conflicts of interest

The Board, as permitted by the Bank’s articles of association, has authorised all potential conflicts of interest that have been
declared by individual directors. Decisions regarding these conflicts of interest could be and were only taken by directors who had
no interest in the matter. In taking the decision, the directors acted in a way they considered, in good faith, would be most likely
to promote the Bank’s success. The directors have the ability to impose conditions, if thought appropriate, when granting
authorisation. Any authorities given are reviewed at least every 15 months. No director is permitted to vote on any resolution or
matter where he or she has an actual or potential conflict of interest. The Board confirms that no material conflicts were reported
to it during the year.
Directors’ indemnities
The directors of the Bank, including the former directors who retired during the year and since the year end, have entered into
individual deeds of indemnity with Lloyds Banking Group plc which constituted ‘qualifying third party indemnity provisions’ and
‘qualifying pension scheme indemnity provisions’ for the purposes of the Companies Act 2006. In addition, Lloyds Banking Group
plc has granted a deed of indemnity through deed poll which constituted 'third party indemnity provisions' and ‘qualifying pension
scheme indemnity provisions’ to the directors of the Bank's subsidiary companies, including to former directors who retired during
the year and since the year end. The deeds were in force during the whole of the financial year or from the date of appointment in
respect of the directors who joined the boards in 2011 and 2012. The indemnities remain in force for the duration of a director’s
period of office. The deeds indemnify the directors to the maximum extent permitted by law. Deeds for existing directors are
available for inspection at the Bank’s registered office.
Share capital
Information about share capital and dividends is shown in notes 37 and 41 on pages 56 and 58 and is incorporated into this
report by reference.
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Directors’ report
Employees
The Bank, as part of Lloyds Banking Group, is committed to providing employment practices and policies which recognise the
diversity of our workforce and ensure equality for employees regardless of sex, race, disability, age, sexual orientation or
religious belief.
In the UK, Lloyds Banking Group belongs to the major employer groups campaigning for equality for the above groups of staff,
including Employers’ Forum on Disability, Employers’ Forum on Age, Stonewall and the Race for Opportunity. Our involvement with
these organisations enables us to identify and implement best practice for our staff.
Employees are kept closely involved in major changes affecting them through such measures as team meetings, briefings, internal
communications and opinion surveys. There are well established procedures, including regular meetings with recognised unions,
to ensure that the views of employees are taken into account in reaching decisions.
Schemes offering share options or the acquisition of shares are available for most staff, to encourage their financial involvement in
Lloyds Banking Group.
Lloyds Banking Group is committed to providing employees with comprehensive coverage of the economic and financial issues
affecting the Group. We have established a full suite of communication channels, including an extensive face-to-face briefing
programme which allows us to update our employees on our performance and any financial issues throughout the year.
Policy and practice on payment of creditors

The Bank has signed up to the ‘Prompt Payment Code’ published by the Department for Business Innovation and Skills (BIS),
regarding the making of payments to suppliers. Information about the ‘Prompt Payment Code’ may be obtained by visiting
www.promptpaymentcode.org.uk.
The Bank’s policy is to agree terms of payment with suppliers and these normally provide for settlement within 30 days after the
date of the invoice, except where other arrangements have been negotiated. It is the policy of the Bank to abide by the agreed
terms of payment, provided the supplier performs according to the terms of the contract.
The number of days required to be shown in this report, to comply with the provisions of the Companies Act 2006, is 14. This
bears the same proportion to the number of days in the year as the aggregate of the amounts owed to trade creditors at 31 December
2011 bears to the aggregate of the amounts invoiced by suppliers during the year.
Essential business contracts

There are no persons with whom the Bank has contractual or other arrangements that are considered essential to the business of
the Bank.
Significant contracts
Details of related party transactions are set out in note 43 on pages 64 to 66.
Research and development activities

During the ordinary course of business the Bank develops new products and services.
Statement of directors’ responsibilities

The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law
and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have
prepared the Group and Bank financial statements in accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union. Under company law the directors must not approve the financial statements unless they
are satisfied that they give a true and fair view of the state of affairs of the Group and the Bank and of the profit or loss of
the Bank and Group for that period. In preparing these financial statements, the directors are required to: select suitable
accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and
prudent; and state whether applicable IFRSs as adopted by the European Union have been followed.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Bank’s
transactions and disclose with reasonable accuracy at any time the financial position of the Bank and the Group and enable
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Directors’ report
them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding
the assets of the Bank and the Group and hence for taking reasonable steps for the prevention and detection of fraud and
other irregularities.
A copy of the financial statements is placed on the website www.lloydsbankinggroup.com. The directors are responsible for
the maintenance and integrity in relation to the Bank on that website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the current directors, whose names are shown on page 6 of this annual report, confirms that, to the best of his or her
knowledge:
–– the financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair
view of the assets, liabilities and financial position of the Bank and Group and the profit or loss of the Group;
–– the business review includes a fair review of the development and performance of the business and the position of the Bank and
Group; and
–– the principal risks and uncertainties faced by the Bank and the Group are set out on pages 8 to 14.
Auditors and audit information

Each person who is a director at the date of approval of this report confirms that, so far as the director is aware, there is no relevant
audit information of which the Bank’s auditors are unaware and each director has taken all the steps that he or she ought to have
taken as a director to make himself or herself aware of any relevant audit information and to establish that the Bank’s auditors are
aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of the Companies
Act 2006.
A resolution will be proposed at the 2012 annual general meeting to reappoint PricewaterhouseCoopers LLP as auditors. The
Bank’s audit committee is satisfied that the external auditors remain independent and effective.
On behalf of the Board
Harry F Baines
Company Secretary
23 February 2012
Company Number 327000
5
Directors
Sir Winfried Bischoff Chairman
A Horta-Osório Group Chief Executive
T J W Tookey Group Finance Director (until 24 February 2012)
A M Frew
Sir Julian Horn-Smith (until 17 May 2012)
Lord Leitch (until 29 February 2012)
G R Moreno
D L Roberts
T T Ryan, Jr
M A Scicluna
A Watson CBE
S V Weller
6
Forward looking statements
This annual report includes certain forward looking statements within the meaning of the US Private Securities Litigation Reform
Act of 1995 with respect to the business, strategy and plans of Bank of Scotland plc and its current goals and expectations relating
to its future financial condition and performance. Statements that are not historical facts, including statements about Bank of
Scotland plc or its directors’ and/or management’s beliefs and expectations, are forward looking statements. Words such as
‘believes’, ‘anticipates’, ‘estimates’, ‘expects’, ‘intends’, ‘aims’, ‘potential’, ’will’, ‘would’, ‘could’, ‘considered’, ‘likely’, ‘estimate’ and
variations of these words and similar future or conditional expressions are intended to identify forward looking statements but are
not the exclusive means of identifying such statements. By their nature, forward looking statements involve risk and uncertainty
because they relate to events and depend upon circumstances that will occur in the future.
Examples of such forward looking statements include, but are not limited to, projections or expectations of the Group’s future
financial position including profit attributable to shareholders, provisions, economic profit, dividends, capital structure, expenditures
or any other financial items or ratios; statements of plans, objectives or goals of the Group or its management including in respect
of certain synergy targets; statements about the future business and economic environments in the United Kingdom (UK) and
elsewhere including future trends in interest rates, foreign exchange rates, credit and equity market levels and demographic
developments; statements about competition, regulation, disposals and consolidation or technological developments in the
financial services industry; and statements of assumptions underlying such statements.
Factors that could cause actual business, strategy, plans and/or results to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not
limited to: general economic and business conditions in the UK and internationally; inflation, deflation, interest rates and policies
of the Bank of England, the European Central Bank and other G8 central banks; fluctuations in exchange rates, stock markets and
currencies; the ability to access sufficient funding to meet the Group’s liquidity needs; changes to the Group’s, Lloyds Banking
Group plc’s, Lloyds TSB Bank plc’s or HBOS plc’s credit ratings; the ability to derive cost savings and other benefits including,
without limitation, as a result of the integration of HBOS and the Group’s Simplification Programme; changing demographic
developments including mortality and changing customer behaviour including consumer spending, saving and borrowing habits;
changes to borrower or counterparty credit quality; instability in the global financial markets including Eurozone instability;
technological changes; natural and other disasters, adverse weather and similar contingencies outside the Group’s control;
inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and
responses to those acts, geopolitical, pandemic or other such events; changes in laws, regulations, taxation, accounting standards
or practices; regulatory capital or liquidity requirements and similar contingencies outside the Group’s control; the policies and
actions of governmental or regulatory authorities in the UK, the European Union (EU), the US or elsewhere; the ability to attract
and retain senior management and other employees; requirements or limitations imposed on Lloyds Banking Group plc, Lloyds
TSB Bank plc, HBOS plc and the Group as a result of HM Treasury’s investment in the Lloyds Banking Group plc; the ability to
complete satisfactorily the disposal of certain assets as part of the Lloyds Banking Group plc’s EU State Aid obligations; the extent
of any future impairment charges or write-downs caused by depressed asset valuations; market related trends and developments;
exposure to regulatory scrutiny, legal proceedings or complaints; changes in competition and pricing environments; the inability to
hedge certain risks economically; the adequacy of loss reserves; the actions of competitors; and the success of the Group in
managing the risks of the foregoing. Please refer to the latest Annual Report on Form 20-F filed with the US Securities and
Exchange Commission for a discussion of certain factors.
The Group may also make or disclose written and/or oral forward looking statements in reports filed with or furnished to the US
Securities and Exchange Commission, Group annual reviews, half-year announcements, proxy statements, offering circulars,
prospectuses, press releases and other written materials and in oral statements made by the directors, officers or employees of the
Group to third parties, including financial analysts. Except as required by any applicable law or regulation, the forward looking
statements contained in this annual report are made as of the date hereof, and Bank of Scotland plc expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this annual
report to reflect any change in Bank of Scotland plc’s expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
7
Principal risks and uncertainties
At present the most significant risks faced by the Group are:
LIQUIDITY AND FUNDING

Risk Definition
Liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or
can only secure them at excessive cost.
Funding risk is defined as the risk that the Group does not have sufficiently stable and diverse sources of funding or the funding
structure is inefficient.
Principal Risks
Liquidity and funding continues to remain a key area of focus for the Group and the industry as a whole. Like all major banks, the
Group is dependent on confidence in the short and long term wholesale funding markets. Should the Group, due to exceptional
circumstances, be unable to continue to source sustainable funding, its ability to fund its financial obligations could be impacted.
The combination of right-sizing the Lloyds Banking Group balance sheet and continued development of the retail deposit base has
seen the Lloyds Banking Group’s wholesale funding requirement reduce in the past year. The progress Lloyds Banking Group has
made to date in diversifying its funding sources has further strengthened its funding base.
During the first half of 2011 the Lloyds Banking Group accelerated term funding initiatives and the run down of certain non-core
asset portfolios allowing a further reduction in total government and central bank facilities. Lloyds Banking Group repaid its
remaining drawings under the Bank of England SLS scheme in full during 2011. Outstandings under the Credit Guarantee Scheme
reduced in line with their contractual maturities, with £23.5 billion remaining at end December. The outstanding amount matures
during 2012.
The second half of 2011 has seen more difficult funding markets as investor confidence was impacted by concerns over the US
debt ceiling and subsequent downgrade. This was followed by increased fears over Eurozone sovereign debt levels, downgrades
and possible defaults and concerns are ongoing over the potential downside effects from financial market volatility. Despite this
Lloyds Banking Group continued to fund adequately, maintaining a broadly stable stock of primary liquid assets during the year
and meeting its regulatory liquidity ratio targets at all times.
Liquidity is managed at the aggregate Lloyds Banking Group level, with active monitoring at both business unit and Group level.
Monitoring and control processes are in place to address both internal and regulatory requirements. In a stress situation the level
of monitoring and reporting is increased commensurate with the nature of the stress event.
The Lloyds Banking Group carries out stress testing of its liquidity position against a range of scenarios, including those prescribed
by the FSA. Lloyds Banking Group’s liquidity risk appetite is also calibrated against a number of stressed liquidity metrics.
Lloyds Banking Group’s stress testing framework considers these factors, including the impact of a range of economic and liquidity
stress scenarios over both short and longer term horizons. Internal stress testing results at 31 December 2011 show that
Lloyds Banking Group has liquidity resources representing more than 130 per cent of modelled outflows from all wholesale
funding sources, corporate deposits and rating dependent contracts under the Group’s severe liquidity stress scenario. In 2011,
Lloyds Banking Group has maintained its liquidity levels in excess of the ILG regulatory minimum (FSA’s Individual Liquidity
Adequacy Standards) at all times. Funding projections show Lloyds Banking Group will achieve the proposed Basel 3 liquidity and
funding requirements in advance of expected implementation dates.
Lloyds Banking Group’s stress testing shows that further credit rating downgrades may reduce investor appetite for some of the
Group’s liability classes and therefore funding capacity. In the fourth quarter of 2011, Lloyds Banking Group experienced
downgrades in its long-term rating of between one and two notches from three of the major rating agencies. The impact that
Lloyds Banking Group experienced following the downgrades was consistent with the Group’s modelled outcomes based on the
stress testing framework. Lloyds Banking Group has materially reduced its wholesale funding in recent years and operates a well
diversified funding platform which together lessen the impact of stress events.
Lloyds Banking Group’s borrowing costs and issuance in the capital markets are dependent on a number of factors, and increased
cost or reduction of capacity could materially adversely affect the Group’s results of operations, financial condition and prospects.
In particular, reduction in the credit rating of Lloyds Banking Group or deterioration in the capital markets’ perception of the Group’s
8
financial resilience, could significantly increase its borrowing costs and limit its issuance capacity in the capital markets. The
impact on the Lloyds Banking Group’s funding cost is subject to a number of assumptions and uncertainties and is therefore
impossible to quantify precisely.
The downgrades that Lloyds Banking Group experienced in the fourth quarter of 2011, did not significantly change its borrowing
costs, reduce its issuance capacity or require significant collateral posting. Lloyds Banking Group notes the recent announcements
from Moody’s placing the ratings of 114 European financial institutions, including Lloyds Banking Group, on review for downgrade.
Even in the case of a simultaneous two notch downgrade from all rating agencies, the Group would remain investment grade.
At 31 December, Lloyds Banking Group had £202billion of highly liquid unencumbered assets in its liquidity portfolio which are
available to meet cash and collateral outflows. This liquidity is available for deployment at immediate notice, subject to complying
with regulatory requirements, and is a key component of the Group’s liquidity management process.
Mitigating Actions
The Group takes many mitigating actions with respect to this principal risk, key examples include:
Lloyds Banking Group has maintained its liquidity levels in excess of the ILG regulatory minimum (FSA’s Individual Liquidity
Adequacy Standards) at all times. Funding projections show that Lloyds Banking Group will achieve the proposed Basel III liquidity
and funding metrics in advance of expected implementation dates. The Liquidity Coverage Ratio (LCR) is due to be implemented
on 1 January 2015 and the Net Stable Funding Ratio (NSFR) has a 1 January 2018 implementation date. The European
Commission released its proposal for implementing Basel III into Europe (CRDIV) in July 2011 and we note that discussions over
the final detail are ongoing.
Lloyds Banking Group carries out monthly stress testing of its liquidity position against a range of scenarios, including those
prescribed by the FSA. The Group’s liquidity risk appetite is also calibrated against a number of stressed liquidity metrics.
The key dependencies on successfully funding the Lloyds Banking Group’s balance sheet include the continued functioning of the
money and capital markets; successful right-sizing of Lloyds Banking Group’s balance sheet; the repayment of the government Credit
Guarantee Scheme facilities in accordance with the agreed terms; no more than limited further deterioration in the UK’s and Lloyds
Banking Group’s credit rating; and no significant or sudden withdrawal of deposits resulting in increased reliance on money markets.
Additionally, Lloyds Banking Group has entered into a number of EU state aid related obligations to achieve reductions in certain parts
of its balance sheet by the end of 2014. These are assumed within Lloyds Banking Group’s funding plan. The requirement to meet
this deadline may result in Lloyds Banking Group having to provide funding to support these asset reductions and/or disposals and
may also result in a lower price being achieved.
CREDIT
Risk Definition
The risk of reductions in earnings and/or value, through financial loss, as a result of the failure of the party with whom the Group
has contracted to meet its obligations (both on and off balance sheet).
Principal Risks
Arising in the retail, wholesale, commercial and wealth and international operations, reflecting the risks inherent in the Group’s
lending activities. Adverse changes in the credit quality of the Group’s UK and/or international borrowers and counterparties, or in
their behaviour, would be expected to reduce the value of the Group’s assets and materially increase the Group’s write-downs and
allowances for impairment losses. Credit risk can be affected by a range of factors, including, inter alia, increased unemployment,
reduced asset values, lower consumer spending, increased personal or corporate insolvency levels, reduced corporate profits,
increased interest rates or higher tenant defaults. Over the last four years, the global banking crisis and economic downturn has
driven cyclically high bad debt charges. These have arisen from the Group’s lending to:
–Wholesale
– customers (including those in wealth and international): where companies continue to face difficult business
conditions. Impairment levels have reduced materially since the peak of the economic downturn and more aggressive risk
appetite when elevated corporate default levels and illiquid commercial property markets resulted in heightened impairment
charges. The UK economy remains fragile. Consumer and business confidence is low, consumer spending has been falling over
the past year, the reduction in public sector spending is deepening and exports are failing to offset domestic weakness. The
possibility of further economic weakness remains. Financial market instability represents an additional downside risk.The Group
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has exposure in both the UK and internationally, including Europe, Ireland, USA and Australia, particularly in commercial real
estate lending, where we have a high level of lending secured on secondary and tertiary assets.
–Retail
– customers: This portfolio will remain strongly linked to the economic environment, with inter alia house price falls,
unemployment increases, consumer over-indebtedness and rising interest rates possible impacts to the secured and unsecured
retail exposures.
Mitigating Actions
The Group takes many mitigating actions with respect to this principal risk, key examples being that the Group follows a relationship
based business model with risk management processes, appetites and experienced staff in place.
REGULATORY
Risk Definition
Regulatory risk is the risk of reductions in earnings and/ or value, through financial or reputational loss, from failing to comply with
the applicable laws, regulations or codes.
Principal Risks
Regulatory exposure is driven by the significant volume of current legislation and regulation within the UK and overseas with which
the Group has to comply, along with new or proposed legislation and regulation which needs to be reviewed, assessed and
embedded into day-to-day operational and business practices across the Group. This is particularly the case in the current market
environment, which continues to witness high levels of government and regulatory intervention in the banking sector.
Lloyds Banking Group faces increased political and regulatory scrutiny as a result of the Group’s perceived size and systemic
importance following the acquisition of HBOS Group.
Independent Commission on Banking

The Government appointed an independent Commission on Banking (ICB) to review possible measures to reform the banking
system and promote stability and competition. The ICB published its final report on 12 September 2011 putting forward
recommendations to require ring-fencing of the retail activities of banks from their investment banking activities and additional
capital requirements beyond those required under current drafts of the Capital Requirements Directive IV. The Report also makes
recommendations in relation to the competitiveness of the UK banking market, including enhancing the competition remit of the
new Financial Conduct Authority (FCA), implementing a new industry-wide switching solution by September 2013, and improving
transparency. The ICB, which following the final report was disbanded, had the authority only to make recommendations, which
the Government could choose to accept or reject.
The ICB specifically recommended in relation to Lloyds Banking Group’s EU mandated branch disposal (Project Verde), that, to
create a strong challenger in the UK banking market, the entity which results from the divestiture should have a share of the
personal current account (PCA) market of at least 6 per cent (although this does not need to arise solely from the current accounts
acquired from the Company) and a funding position at least as strong as its peers. The ICB did not specify a definitive timeframe
for the divested entity to achieve a 6 per cent market share of PCAs but recommended that a market investigation should be
carefully considered by competition authorities if ‘a strong and effective challenger’ has not resulted from Lloyds Banking Group's
divestiture by 2015. The ICB did not recommend explicitly that Lloyds Banking Group should increase the size of the Project Verde
disposal agreed with the European Commission but recommended that the Government prioritise the emergence of a strong new
challenger over reducing market concentration through a ‘substantially enhanced’ divestiture by Lloyds Banking Group.
The Government published its response to the ICB recommendations on 19 December 2011. The Government supported the
recommendation that an entity with a larger share of the PCA market than the 4.6 per cent originally proposed might produce a
more effective competitor. In relation to Lloyds Banking Group’s announcement that it was to pursue exclusive negotiations with
the Co-operative Group, the Government commented that such a transaction would deliver a significant enhancement of the PCA
market share, with the share divested by Lloyds Banking Group combining with the Co-operative Group’s existing share to create
a competitor with approximately 7-8 per cent. The Government also stated that the execution of the divestment is a commercial
matter, and it has no intention of using its shareholding to deliver an enhancement.
New Regulatory Regime

On 27 January 2012, the Government published the Financial Services Bill. The proposed new UK regulatory architecture will
see the transition of regulatory and supervisory powers from the FSA to the new Financial Conduct Authority (FCA) and Prudential
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Regulatory Authority (PRA). The PRA will be responsible for supervising banks, building societies and other large firms. The FCA
will focus on consumer protection and market regulation. The Bill is also proposing new responsibilities and powers for the FCA.
The most noteworthy are the proposed greater powers for the FCA in relation to competition and the proposal to widen its scope
to include consumer credit. The Bill is expected to take effect in early 2013.
In April 2011, the FSA commenced an internal reorganisation as a first step in a process towards the formal transition of regulatory
and supervisory powers from the FSA to the new FCA and PRA in 2013. Until this time the responsibility for regulating and
supervising the activities of the Group and its subsidiaries will remain with the FSA. On 2 April the FSA will introduce a new ‘twin
peaks’ model and the intention is to move the FSA as close as possible to the new style of regulation outlined in the Bill. There will
be two independent groups of supervisors for banks, insurers and major investment firms covering prudential and conduct. (All
other firms (those not dual regulated) will be solely supervised by the conduct supervisors).
In addition, the European Banking Authority, the European insurance and Occupational Pensions Authority and the European securities
and Markets Authority as new EU Supervisory Authorities are likely to have greater influence on regulatory matters across the EU.
Capital and Liquidity
Evolving capital and liquidity requirements continue to be a priority for Lloyds Banking Group. The Basel Committee on Banking
Supervision has put forward proposals for a reform package which changes the regulatory capital and liquidity standards, the
definition of ‘capital’, introduces new definitions for the calculation of counterparty credit risk and leverage ratios, additional capital
buffers and development of a global liquidity standard. Implementation of these changes is expected to be phased in between
2013 and 2018.
Anti Bribery
The Bribery Act 2010 came fully into force on 1 July 2011. It enhances previous laws on bribery and is supported by some
detailed guidance issued by the Ministry of Justice on the steps a business needs to take to embed ‘adequate procedures’ to
prevent bribery. A company convicted of failing to have ‘adequate procedures’ to prevent bribery could receive an unlimited fine.
The Group operates a Group-wide Anti-Bribery Policy, applicable to all of its businesses, operations and employees, which
incorporates the requirements of the UK Bribery Act 2010.
Sanctions
The Group takes very seriously its responsibilities for complying with legal and regulatory sanctions requirements in all the
jurisdictions in which it operates. In order to assist adherence to relevant economic sanctions legislation, the Group has enhanced
its internal compliance processes including those associated with customer and payment screening. The Group has continued the
delivery of a programme of staff training regarding policies and procedures for detecting and preventing economic sanctions non-
compliance.
US Regulation
Significant regulatory initiatives from the US impacting the Group include the Dodd-Frank Act (which imposes specific requirements
for systemic risk oversight, securities market conduct and oversight, bank capital standards, arrangements for the liquidation of
failing systemically significant financial institutions and restrictions to the ability of banks to engage in proprietary trading activities
known as the ‘Volcker Rule’). The Act will have both business and operational implications for the Group within and beyond the
US. In addition the Foreign Account Tax Compliance Act (FATCA) requires non-US financial institutions to enter into disclosure
agreements with the US Treasury and all non-financial non-US entities to report and or certify their ownership of US assets in
foreign accounts or be subject to 30 per cent withholding tax.
European Regulation
At a European level, the pace of regulatory reform has increased with a number of new directives or changes to existing directives
planned in the next 12 months including a revised Markets in Financial Instruments Directive, Transparency Directive, Insurance
Mediation Directive and a Fifth Undertakings in Collective Investments in Transferable Securities Directive as well as a proposed
Directive regulating Packaged Retail Investment Products.
Mitigating Actions
11
Independent Commission on Banking

Lloyds Banking Group continues to play a constructive role in the debate with the Government and other stakeholders on all issues
under consideration in relation to the ICB’s recommendations.
New Regulatory Regime
Lloyds Banking Group continues to work closely with the regulatory authorities and industry associations to ensure that it is able
to identify and respond to regulatory changes and mitigate against risks to the Group and its stakeholders.
Capital and Liquidity

Lloyds Banking Group is continuously assessing the impacts of regulatory developments which could have a material effect on the
Group and is progressing its plans to implement regulatory changes and directives through change management programmes.
Anti Bribery
The Group has no appetite for bribery and explicitly prohibits the payment, offer, acceptance or request of a bribe, including
‘facilitation payments’.
The Group has enhanced its internal compliance processes including those associated with payment screening, colleague training
and hospitality.
US and European Regulation

Lloyds Banking Group is continuously assessing the impacts of regulatory developments which could have a material effect on the
Group and is progressing with its plans to implement regulatory changes and directives through change management programmes.
MARKET RISK
Risk Definition
The risk of reductions in earnings and/or value, through financial or reputational loss, from unfavourable market moves; including
changes in, and increased volatility of, interest rates, market-implied inflation rates, credit spreads, foreign exchange rates, equity,
property and commodity prices.
Principal Risks
The Group has a number of Market risks, the principal one being:
––There is a risk to the Group’s banking income arising from the level of interest rates and the margin of interbank rates over central
bank rates. A further banking risk arises from competitive pressures on product terms in existing loans and deposits, which
sometimes restrict the Group in its ability to change interest rates applying to customers in response to changes in interbank and
central bank rates.
ontinuing concerns about the fiscal position in Eurozone countries resulted in increased credit spreads in the areas affected, and
C
fears of contagion affected the Euro and widened spreads between central bank and interbank rates.
Mitigating Actions
Market risk is managed within a Lloyds Banking Group Board approved framework using a range of metrics to monitor against
stated appetite and potential market conditions.
Market Risk is reported regularly to appropriate committees.
The Group’s trading activity is small relative to our peers and is not considered to be a principal risk.
CUSTOMER TREATMENT
Risk Definition
The risk of regulatory censure and/or a reduction in earnings/value, through financial or reputational loss, from inappropriate or
poor customer treatment.
Principal Risks
Customer treatment and how the Group manages its customer relationships affect all aspects of the Group’s operations and are
closely aligned with achievement of Lloyds Banking Group’s strategic vision to be the best bank for customers. As a provider of a
wide range of financial services products and numerous distribution channels to an extremely broad and varied customer base, we
12
face significant conduct risks, such as: products or services not meeting the needs of our customers; sales processes which could
result in selling products to customers which do not meet their needs; failure to deal with a customer’s complaint effectively where
we have got it wrong and not met customer expectations.
There remains a high level of scrutiny regarding the treatment of customers by financial institutions from regulatory bodies, the
press and politicians. The FSA in particular continues to drive focus on conduct of business activities through its supervision activity.
There is a risk that certain aspects of the Group’s business may be determined by regulatory bodies or the courts as not being
conducted in accordance with applicable laws or regulations, or fair and reasonable in their opinion. The Group may also be liable
for damages to third parties harmed by the conduct of its business.
Mitigating Actions
Lloyds Banking Group’s Conduct Risk Strategy and supporting framework have been designed to support our vision and strategic
aim to put the customer at the heart of everything we do. Lloyds Banking Group have developed and implemented a framework
to enable us to deliver the right outcomes for our customers, which is supported by Policies and Standards in key areas, including
product governance, sales, responsible lending, customers in financial difficulties, claims and complaints handling.
Lloyds Banking Group actively engages with regulatory bodies and other stakeholders in developing its understanding of current
customer treatment concerns.
PEOPLE
Risk Definition
The risk of reductions in earnings or value through financial or reputational loss arising from ineffectively leading colleagues
responsibly and proficiently, managing people resource, supporting and developing colleague talent, or meeting regulatory
obligations related to our people.
Principal Risks
The quality and effectiveness of our people are fundamental to its success. Consequently, the Group’s management of material
people risks is critical to its capacity to deliver against its long-term strategic objectives. Over the next year the Group’s ability to
manage people risks successfully may be affected by the following key drivers:
–Lloyds
– Banking Group’s continuing structural consolidation and the sale of part of our branch network under Project Verde may
result in disruption to our ability to lead and manage our people effectively
–The
– continually changing, more rigorous regulatory environment may impact people strategy, remuneration practices and
retention
–Macroeconomic
– conditions and negative media attention on the banking sector may impact retention, colleague sentiment
and engagement.
Mitigating Actions
–Strong
– focus on leadership and colleague engagement, through delivery of strategies to attract, retain and develop high calibre
staff together with implementation of rigorous succession planning
–A
– continued focus on people risk management across the Group
–Ensuring
– compliance with regulatory requirements related to Approved Persons and the FSA Remuneration Code, and embedding
compliant and appropriate colleague behaviours in line with Group policies, values and people risk priorities
–Strengthening
– risk management culture and capability across the Group, together with further embedding of risk objectives in the
colleague performance and reward process.
STATE FUNDING AND STATE AID

HM Treasury currently holds approximately 40.2 per cent of Lloyds Banking Group plc’s ordinary share capital. United Kingdom
Financial Investments Limited (UKFI) as manager of HM Treasury’s shareholding continues to operate in line with the framework
document between UKFI and HM Treasury managing the investment in Lloyds Banking Group plc on a commercial basis without
interference in day-to-day management decisions. There is a risk that a change in Government priorities could result in the
13
framework currently in place being replaced leading to interference in the operations of the Group, although there have been no
indications that the Government intends to change the existing operating arrangements.
Lloyds Banking Group made a number of undertakings to HM Treasury arising from the capital and funding support, including the
provision of additional lending to certain mortgage and business sectors for the two years to 28 February 2011, and other matters
relating to corporate governance and colleague remuneration. The lending commitments were subject to prudent commercial
lending and pricing criteria, the availability of sufficient funding and sufficient demand from creditworthy customers. These lending
commitments were delivered in full in the second year.
The subsequent agreement (known as ‘Merlin’) between five major UK banks (including Lloyds Banking Group) and the Government
in relation to gross business lending capacity in the 2011 calendar year was subject to a similar set of criteria. Lloyds Banking
Group delivered in full its share of the commitments by the five banks, both in respect of lending to Small and Medium Sized
Enterprises (SMEs) and in respect of overall gross business lending. Lloyds Banking Group has made a unilateral lending pledge
for 2012 as part of its publicly announced SME charter.
In addition, Lloyds Banking Group is subject to European state aid obligations in line with the Restructuring Plan agreed with
HM Treasury and the EU College of Commissioners in November 2009, which is designed to support the long‑term viability of the
Group and remedy any distortion of competition and trade in the European Union (EU) arising from the State aid given to
Lloyds Banking Group.
This has placed a number of requirements on the Lloyds Banking Group including an asset reductions target from a defined pool
of assets by the end of 2014 and the disposal of a certain portion of its retail business by the end of November 2013. In June
2011 Lloyds Banking Group issued an Information Memorandum to potential bidders of this retail banking business, which the
European Commission confirmed met the requirements to commence the formal sale process for the sale no later than 30 November
2011. On 14 December 2011 Lloyds Banking Group announced that having reviewed the formal offers made, its preferred option
was for a direct sale and that it was entering into exclusive discussions with The Co-operative Group. Lloyds Banking Group is also
continuing to progress an Initial Public Offering (IPO) in parallel. Lloyds Banking Group continues to work closely with the EU
Commission, HM Treasury and the Monitoring Trustee appointed by the EU Commission to ensure the successful implementation
of the Restructuring Plan.
14
Independent auditors’ report
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF BANK OF SCOTLAND PLC
We have audited the Group and the Bank financial statements (the ‘financial statements’) of Bank of Scotland plc for the year
ended 31 December 2011 which comprise the consolidated income statement, the Group and the Bank statements of
comprehensive income, the Group and the Bank balance sheets, the Group and the Bank statements of changes in equity, the
Group and the Bank cash flow statements and the related notes. The financial reporting framework that has been applied in their
preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as
regards the Bank financial statements, as applied in accordance with the provisions of the Companies Act 2006.
Respective responsibilities of directors and auditors

As explained more fully in the Statement of directors’ responsibilities on page 5 the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an
opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland).
Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Bank’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the Group’s and Bank’s circumstances and have been consistently
applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall
presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report
and Accounts to identify material inconsistencies with the audited financial statements. If we become aware of any apparent
material misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements

In our opinion:
––the financial statements give a true and fair view of the state of the Group’s and of the Bank’s affairs as at 31 December 2011
and of the Group’s loss and the Group’s and Bank’s cash flows for the year then ended;
–the
– Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
––the Bank financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as
applied in accordance with the provisions of the Companies Act 2006; and
––the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards
the group financial statements, Article 4 of the lAS Regulation.
Opinion on other matter prescribed by the Companies Act 2006

In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared
is consistent with the financial statements.
15
Independent auditors’ report
Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our
opinion:
––adequate accounting records have not been kept by the Bank, or returns adequate for our audit have not been received from
branches not visited by us; or
–the
– Bank financial statements are not in agreement with the accounting records and returns; or
–certain
– disclosures of directors’ remuneration specified by law are not made; or
–we
– have not received all the information and explanations we require for our audit.
Philip Rivett
Senior Statutory Auditor
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
23 February 2012
(a) The maintenance and integrity of the Lloyds Banking Group plc website is the responsibility of the Group directors; the work
carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility
for any changes that may have occurred to the financial statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
16
Consolidated income statement

for the year ended 31 December 2011
2011 2010
Note £ million £ million
Interest and similar income 16,748 18,502
Interest and similar expense (8,891) (9,677)
Net interest income 5 7,857 8,825
Fee and commission income 1,208 1,281
Fee and commission expense (286) (237)
Net fee and commission income 6 922 1,044
Net trading income 7 (646) 771
Other operating income 8 461 1,665
Other income 737 3,480
Total income 8,594 12,305
Payment protection insurance provision (1,155) –
Other operating expenses (3,823) (5,162)
Operating expenses 9 (4,978) (5,162)
Trading surplus 3,616 7,143
Impairment 10 (7,104) (10,926)
Share of results of joint ventures and associates 11 27 (88)
Loss before tax (3,461) (3,871)
Taxation 12 356 68
Loss for the year (3,105) (3,803)
Profit attributable to non-controlling interests – 10

Loss attributable to equity shareholders (3,105) (3,813)
The accompanying notes are an integral part of the financial statements.
17
Statements of comprehensive income

2011 2010
The Group £ million £ million
Other comprehensive income
Movements in revaluation reserve in respect of available-for-sale financial assets:
Change in fair value (90) 197
Income statement transfers in respect of disposals (72) (52)
Income statement transfers in respect of impairment 749 641
Other income statement transfers (76) (62)
Taxation (129) (228)
382 496
Movements in cash flow hedging reserve:
Effective portion of changes in fair value taken to other comprehensive income 1,350 (782)
Net income statement transfers 373 1,377
1,276 424
Currency translation differences (tax: nil) 2 (207)
Other comprehensive income for the year, net of tax 1,660 713
Total comprehensive income for the year (1,445) (3,090)
Total comprehensive income attributable to non-controlling interests – 10

Total comprehensive income attributable to equity shareholders (1,445) (3,100)
2011 2010
The Bank £ million £ million
Movements in revaluation reserve in respect of available-for-sale financial assets:
Change in fair value (123) (194)
Income statement transfers in respect of disposals 106 46
Income statement transfers in respect of impairment 292 116
Other income statement transfers (76) (62)
Taxation (52) 15
147 (79)
Movements in cash flow hedging reserve:
Effective portion of changes in fair value taken to other comprehensive income 1,342 (787)
Net income statement transfers 373 1,377
1,269 420
Currency translation differences (tax: nil) 14 4
Other comprehensive income for the year, net of tax 1,430 345
18
Balance sheets
at 31 December 2011
The Group The Bank

2011 2010 2011 2010
Note £ million £ million £ million £ million
Assets
Cash and balances at central banks 3,070 2,375 3,065 2,318
Items in the course of collection from banks 431 319 431 314
Trading and other financial assets at fair value through
profit or loss 13 22,315 24,696 22,004 24,397
Derivative financial instruments 14 36,283 29,451 35,820 27,362
Loans and receivables:
Loans and advances to banks 15 89,490 61,349 89,270 61,024
Loans and advances to customers 16 376,355 405,525 386,184 415,628
Debt securities 19 11,886 23,632 15,407 17,433
477,731 490,506 490,861 494,085
Available-for-sale financial assets 21 8,288 14,422 6,896 13,507
Investment properties 22 1,185 789 – –
Investments in joint ventures and associates 11 302 401 104 104
Goodwill 25 385 376 376 376
Other intangible assets 26 69 58 63 58
Tangible fixed assets 27 2,367 3,433 1,012 1,178
Current tax recoverable 593 214 679 –
Deferred tax assets 34 4,050 4,826 3,722 4,519
Investment in subsidiary undertakings 23 – – 1,374 1,540
Other assets 28 1,074 1,928 940 1,684
Total assets 558,143 573,794 567,347 571,442
The accompanying notes are an integral part of the consolidated financial statements.
19
Balance sheets
at 31 December 2011
The Group The Bank

2011 2010 2011 2010
Equity and liabilities Note £ million £ million £ million £ million
Liabilities
Deposits from banks 29 150,070 143,056 149,608 141,839
Customer deposits 30 235,855 241,517 260,232 271,900
Items in course of transmission to banks 332 251 330 251
Trading liabilities 31 20,805 18,786 20,805 18,786
Derivative financial instruments 14 35,262 27,268 34,926 26,986
Notes in circulation 1,145 1,074 1,145 1,074
Debt securities in issue 32 75,449 100,721 63,178 72,811
Other liabilities 33 4,539 5,013 4,617 4,012
Current tax liabilities 54 42 44 22
Deferred tax liabilities 34 1 1 – 9
Other provisions 35 1,063 786 1,014 765
Subordinated liabilities 36 15,155 15,236 14,572 15,110
Total liabilities 539,730 553,751 550,471 553,565
Equity
Share capital 37 5,847 5,847 5,847 5,847
Share premium account 38 27,479 27,479 27,479 27,479
Other reserves 39 2,275 615 2,384 954
Retained profits 40 (17,204) (14,099) (18,834) (16,403)
Shareholders’ equity 18,397 19,842 16,876 17,877
Non-controlling interests 16 201 – –
Total equity 18,413 20,043 16,876 17,877
Total equity and liabilities 558,143 573,794 567,347 571,442
The directors approved the consolidated financial statements on 23 February 2012.
Sir Winfried Bischoff António Horta-Osório Tim J W Tookey

Chairman Chief Executive Finance Director
20
Statements of changes in equity

Attributable to equity shareholders

Share Non-
capital and Other Retained controlling
premium reserves profits Total interests Total
The Group £ million £ million £ million £ million £ million £ million
Balance at 1 January 2010 32,531 (517) (9,867) 22,147 206 22,353
Comprehensive income
(Loss) profit for the year – – (3,813) (3,813) 10 (3,803)
Movements in revaluation reserve in
respect of available-for-sale financial
assets, net of tax – 496 – 496 – 496
Movements in cash flow hedging reserve,
net of tax – 424 – 424 – 424
Currency translation differences, net of tax – (207) – (207) – (207)
Total other comprehensive income – 713 – 713 – 713
Total comprehensive income – 713 (3,813) (3,100) 10 (3,090)
Transactions with owners
Dividends – – – – (15) (15)
Issue of ordinary shares 795 – – 795 – 795
Capital redemption – 419 (419) – – –
Total transactions with owners 795 419 (419) 795 (15) 780
Balance at 31 December 2010 33,326 615 (14,099) 19,842 201 20,043
(Loss) profit for the year – – (3,105) (3,105) – (3,105)
Movements in revaluation reserve in
respect of available-for-sale financial
assets, net of tax – 382 – 382 – 382
Movements in cash flow hedging reserve,
net of tax – 1,276 – 1,276 – 1,276
Currency translation differences, net of tax – 2 – 2 – 2
Total other comprehensive income – 1,660 – 1,660 – 1,660
Total comprehensive income – 1,660 (3,105) (1,445) – (1,445)
Change in non-controlling interests – – – – (185) (185)
Balance at 31 December 2011 33,326 2,275 (17,204) 18,397 16 18,413
Further details of movements in the Group's share capital and reserves are provided in notes 37, 38, 39 and 40.
21
Statements of changes in equity

Share
capital and Other Retained
premium reserves profits Total
The Bank £ million £ million £ million £ million
Balance at 1 January 2010 32,531 190 (12,746) 19,975
Loss for the year – – (4,785) (4,785)
Movements in revaluation reserve in respect of available-for-sale
financial assets, net of tax – (79) – (79)
Movements in cash flow hedging reserve, net of tax – 420 – 420
Currency translation differences, net of tax – 4 – 4
Total other comprehensive income – 345 – 345
Total comprehensive income – 345 (4,785) (4,440)
Issue of ordinary shares 795 – – 795
Capital redemption reserve – 419 (419) –
Adjustment arising on merger by absorption of Bank of Scotland (Ireland)
Limited (note 24) – – 1,547 1,547
Total transactions with owners 795 419 1,128 2,342
Balance at 31 December 2010 33,326 954 (16,403) 17,877
Loss for the year – – (2,431) (2,431)
Movements in revaluation reserve in respect of available-for-sale
financial assets, net of tax – 147 – 147
Movements in cash flow hedging reserve, net of tax – 1,269 – 1,269
Currency translation differences, net of tax – 14 – 14
Total other comprehensive income – 1,430 – 1,430
Total comprehensive income – 1,430 (2,431) (1,001)
Balance at 31 December 2011 33,326 2,384 (18,834) 16,876
There were no transactions with owners in 2011.
22
Cash flow statements

The Group The Bank

2011 2010 2011 2010
Note £ million £ million £ million £ million
Loss before tax (3,461) (3,871) (2,780) (4,712)
Adjustments for:
Change in operating assets 48(a) 7,821 71,910 (2,606) 87,789
Change in operating liabilities 48(b) (14,304) (79,189) (2,809) (89,970)
Non-cash and other items 48(c) 1,912 (22) 2,104 2,327
Tax received (paid) 169 628 (47) 645
Net cash used in operating activities (7,863) (10,544) (6,138) (3,921)
Cash flows from investing activities
Purchase of available-for-sale financial assets (3,967) (1,561) (3,335) (1,045)
Proceeds from sale and maturity of available-for-sale
financial assets 9,747 10,293 9,591 9,937
Purchase of fixed assets (391) (983) (188) (274)
Proceeds from sale of fixed assets 1,348 594 78 150
Additional capital injections to subsidiaries – – (465) (4,283)
Capital repayment by subsidiaries – – 75 –
Acquisition of businesses, net of cash acquired (62) (60) (50) –
Disposal of businesses, net of cash disposed 48(e) 298 2,587 141 –
Net cash provided by investing activities 6,973 10,870 5,847 4,485
Cash flows from financing activities
Dividends paid to non-controlling interests – (15) – –
Interest paid on subordinated liabilities (481) (500) (427) (411)
Repayment of subordinated liabilities (94) (331) (591) (331)
Net cash used in financing activities (575) (846) (1,018) (742)
Effects of exchange rate changes on cash and cash equivalents 1 – 1 –
Change in cash and cash equivalents (1,464) (520) (1,308) (178)
Cash and cash equivalents at beginning of year 6,382 6,902 6,000 6,178
Cash and cash equivalents at end of year 48(d) 4,918 6,382 4,692 6,000
23
Notes to the accounts
1 Basis of preparation
The financial statements of Bank of Scotland plc have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the
European Union (EU) as applied in accordance with the provisions of the Companies Act 2006. IFRS comprises accounting standards prefixed IFRS issued by the
International Accounting Standards Board (IASB) and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the International
Financial Reporting Interpretations Committee (IFRIC) and its predecessor body. The EU endorsed version of IAS 39 Financial Instruments: Recognition and
Measurement relaxes some of the hedge accounting requirements; the Group has not taken advantage of this relaxation, and therefore there is no difference in
application to the Group between IFRS as adopted by the EU and IFRS as issued by the IASB. The financial information has been prepared under the historical cost
convention, as modified by the revaluation of investment properties, available‑for-sale financial assets, trading securities and certain other financial assets and
liabilities at fair value through profit or loss and all derivative contracts.
The going concern of the Bank and the Group is dependent on successfully funding their respective balance sheets and maintaining adequate levels of capital. In
order to satisfy themselves that the Bank and the Group have adequate resources to continue to operate for the foreseeable future, the directors have considered a
number of key dependencies which are set out in the Principal risks and uncertainties section under Liquidity and funding on page 8 and additionally have considered
projections for the Group’s capital and funding position. Taking all of these factors into account, the directors consider that it is appropriate to continue to adopt the
going concern basis in preparing the accounts.
The Group has adopted the following new standards and amendments to standards which became effective for financial years beginning on or after 1 January 2011.
None of these standards or amendments have had a material impact on these financial statements.
(i) Amendment to IAS 32 Financial Instruments: Presentation – ‘Classification of Rights Issues’. Requires rights issues denominated in a currency other than the
functional currency of the issuer to be classified as equity regardless of the currency in which the exercise price is denominated.
(ii) IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. Clarifies that when an entity renegotiates the terms of its debt with the result that the liability
is extinguished by the debtor issuing its own equity instruments to the creditor, a gain or loss is recognised in the income statement representing the difference
between the carrying value of the financial liability and the fair value of the equity instruments issued; the fair value of the financial liability is used to measure
the gain or loss where the fair value of the equity instruments cannot be reliably measured.
(iii) Improvements to IFRSs (issued May 2010). Amends IFRS 7 Financial Instruments: Disclosure to require further disclosures in respect of collateral held by the
Group as security for financial assets and sets out minor amendments to other standards as part of the annual improvements process.
(iv) Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement. Applies when an entity is subject to minimum funding requirements and makes
an early payment of contributions to cover those requirements and permits such an entity to treat the benefit of such an early payment as an asset.
(v) IAS 24 Related Party Disclosures (Revised). Simplifies the definition of a related party and provides a partial exemption from the requirement to disclose
transactions and outstanding balances with the government and government-related entities. The Group has taken advantage of an exemption in respect of
government and government-related transactions that permits an entity to disclose only transactions that are individually or collectively significant. Details of
related party transactions are disclosed in note 43.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2011 and which have not been applied in
preparing the financial statements are given in note 49.
2 Accounting policies
The accounting policies are set out below.
a Consolidation
The assets, liabilities and results of Group undertakings (including special purpose entities) are included in the financial statements on the basis of accounts made
up to the reporting date. Group undertakings include subsidiaries, joint ventures and associates.
(1) Subsidiaries
Subsidiaries include entities over which the Group has the power to govern the financial and operating policies which generally accompanies a shareholding of more
than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing
whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group; they are de-consolidated
from the date that control ceases. Details of the principal subsidiaries are given in note 23.
Special purpose entities (SPEs) are consolidated if, in substance, the Group controls the entity. A key indicator of such control, amongst others, is where the Group
is exposed to the risks and benefits of the SPE.
The treatment of transactions with non-controlling interests depends on whether, as a result of the transaction, the Group loses control of the subsidiary. Changes in
the parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions; any difference between the amount by
which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners
of the parent entity. Where the group loses control of the subsidiary, at the date when control is lost the amount of any non-controlling interest in that former subsidiary
is derecognised and any investment retained in the former subsidiary is remeasured to its fair value; the gain or loss that is recognised in profit or loss on the partial
disposal of the subsidiary includes the gain or loss on the remeasurement of the retained interest.
Intercompany transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated.
The acquisition method of accounting is used to account for business combinations by the Group. The consideration for the acquisition of a subsidiary is the fair
value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration includes the fair value of any asset or liability
resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred except those relating to the issuance of debt instruments
(see 2e(4)) or share capital (see 2p(1)). Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair value at the
acquisition date.
24
2 Accounting policies (continued)
(2) Joint ventures and associates

Joint ventures are entities over which the Group has joint control under a contractual arrangement with other parties. Associates are entities over which the Group
has significant influence, but not control or joint control, over the financial and operating policies. Significant influence is the power to participate in the financial and
operating policy decisions of the entity and is normally achieved through holding between 20 per cent and 50 per cent of the voting share capital of the entity.
The Group utilises the venture capital exemption for investments where significant influence or joint control is present and the business unit operates as a venture
capital business. These investments are designated at initial recognition at fair value through profit or loss. Otherwise, the Group’s investments in joint ventures
and associates are accounted for by the equity method of accounting and are initially recorded at cost and adjusted each year to reflect the Group’s share of the
post-acquisition results of the joint venture or associate based on audited accounts which are coterminous with the Group or made up to a date which is not more
than three months before the Group’s reporting date. The share of any losses is restricted to a level that reflects an obligation to fund such losses.
b Goodwill
Goodwill arises on business combinations, including the acquisition of subsidiaries, and on the acquisition of interests in joint ventures and associates; goodwill
represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities acquired. Where
the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities of the acquired entity is greater than the cost of acquisition, the excess
is recognised immediately in the income statement.
Goodwill is recognised as an asset at cost and is tested at least annually for impairment. If an impairment is identified the carrying value of the goodwill is written
down immediately through the income statement and is not subsequently reversed. Goodwill arising on acquisitions of associates and joint ventures is included in
the Group’s investment in joint ventures and associates. At the date of disposal of a subsidiary, the carrying value of attributable goodwill is included in the calculation
of the profit or loss on disposal except where it has been written off directly to reserves in the past.
c Other intangible assets

Other intangible assets include brands and both internally and externally generated capitalised software enhancements. Intangible assets which have been determined
to have a finite useful life are amortised on a straight line basis over their estimated useful life as follows:
Capitalised software enhancements up to 5 years

Brands (which have been assessed as having finite lives) 10-15 years
Intangible assets with finite useful lives are reviewed at each reporting date to assess whether there is any indication that they are impaired. If any such indication
exists the recoverable amount of the asset is determined and in the event that the asset’s carrying amount is greater than its recoverable amount, it is written down
immediately. Certain brands have been determined to have an indefinite useful life and are not amortised. Such intangible assets are reassessed annually to reconfirm
that an indefinite useful life remains appropriate. In the event that an indefinite life is inappropriate a finite life is determined and an impairment review is performed
on the asset.
d Revenue recognition
Interest income and expense are recognised in the income statement for all interest-bearing financial instruments, except for those classified at fair value through
profit or loss, using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or liability and of
allocating the interest income or interest expense over the expected life of the financial instrument. The effective interest rate is the rate that exactly discounts the
estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the
financial asset or financial liability.
The effective interest rate is calculated on initial recognition of the financial asset or liability by estimating the future cash flows after considering all the contractual
terms of the instrument but not future credit losses. The calculation includes all amounts expected to be paid or received by the Group including expected early
redemption fees and related penalties and premiums and discounts that are an integral part of the overall return. Direct incremental transaction costs related to the
acquisition, issue or disposal of a financial instrument are also taken into account in the calculation. Once a financial asset or a group of similar financial assets has
been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose
of measuring the impairment loss (see accounting policy 2h).
Fees and commissions which are not an integral part of the effective interest rate are generally recognised when the service has been provided. Loan commitment
fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the
loan once drawn. Where it is unlikely that loan commitments will be drawn, loan commitment fees are recognised over the life of the facility. Loan syndication fees
are recognised as revenue when the syndication has been completed and the Group retains no part of the loan package for itself or retains a part at the same effective
interest rate for all interest-bearing financial instruments, including loans and advances, as for the other participants.
Dividend income is recognised when the right to receive payment is established.
e Financial assets and liabilities

On initial recognition, financial assets are classified into fair value through profit or loss, available-for-sale financial assets or loans and receivables. Financial liabilities
are measured at amortised cost, except for trading liabilities and other financial liabilities designated at fair value through profit or loss on initial recognition which
are held at fair value. Purchases and sales of securities and other financial assets and trading liabilities are recognised on trade date, being the date that the Group
is committed to purchase or sell an asset.
Financial assets are derecognised when the contractual right to receive cash flows from those assets has expired or when the Group has transferred its contractual
right to receive the cash flows from the assets and either:
––substantially all of the risks and rewards of ownership have been transferred; or
––the Group has neither retained nor transferred substantially all of the risks and rewards, but has transferred control.
Financial liabilities are derecognised when they are extinguished (ie when the obligation is discharged), cancelled or expire.
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(1) Financial instruments at fair value through profit or loss

Financial instruments are classified at fair value through profit or loss where they are trading securities or where they are designated at fair value through profit or
loss by management. Derivatives are carried at fair value (see accounting policy 2f).
Trading securities are debt securities and equity shares acquired principally for the purpose of selling in the short term or which are part of a portfolio which is
managed for short-term gains. Such securities are classified as trading securities and recognised in the balance sheet at their fair value. Gains and losses arising from
changes in their fair value together with interest coupons and dividend income are recognised in the income statement within net trading income in the period in
which they occur.
Other financial assets and liabilities at fair value through profit or loss are designated as such by management upon initial recognition. Such assets and liabilities are
carried in the balance sheet at their fair value and gains and losses arising from changes in fair value together with interest coupons and dividend income are
recognised in the income statement within net trading income in the period in which they occur. Financial assets and liabilities are designated at fair value through
profit or loss on acquisition in the following circumstances:
––it eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets and liabilities or recognising gains or losses
on different bases.
––the assets and liabilities are part of a group which is managed, and its performance evaluated, on a fair value basis in accordance with a documented risk
management or investment strategy, with management information also prepared on this basis. As noted in accounting policy 2a(2), certain of the Group’s
investments are managed as venture capital investments and evaluated on the basis of their fair value and these assets are designated at fair value through profit
or loss.
––where the assets and liabilities contain one or more embedded derivatives that significantly modify the cash flows arising under the contract and would otherwise
need to be separately accounted for.
The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group establishes
a fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same,
discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. Refer to note 3 (Critical accounting
estimates and judgements: Fair value of financial instruments) and note 45(3) (Financial instruments: Fair values of financial assets and liabilities) for details of
valuation techniques and significant inputs to valuation models.
The Group is permitted to reclassify, at fair value at the date of transfer, non-derivative financial assets (other than those designated at fair value through profit or loss
by the entity upon initial recognition) out of the trading category if they are no longer held for the purpose of being sold or repurchased in the near term, as follows:
––if the financial assets would have met the definition of loans and receivables (but for the fact that they had to be classified as held for trading at initial recognition),
they may be reclassified into loans and receivables where the Group has the intention and ability to hold the assets for the foreseeable future or until maturity;
––if the financial assets would not have met the definition of loans and receivables, they may be reclassified out of the held for trading category into available-for-sale
financial assets in ‘rare circumstances’.
(2) Available-for-sale financial assets

Debt securities and equity shares that are not classified as trading securities, at fair value through profit or loss or as loans and receivables are classified as available-
for-sale financial assets and are recognised in the balance sheet at their fair value, inclusive of transaction costs. Available‑for‑sale financial assets are those intended
to be held for an indeterminate period of time and may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Gains
and losses arising from changes in the fair value of investments classified as available‑for‑sale are recognised directly in other comprehensive income, until the
financial asset is either sold, becomes impaired or matures, at which time the cumulative gain or loss previously recognised in other comprehensive income is
recognised in the income statement. Interest calculated using the effective interest method and foreign exchange gains and losses on debt securities denominated in
foreign currencies are recognised in the income statement.
The Group is permitted to transfer a financial asset from the available-for-sale category to the loans and receivables category where that asset would have met the
definition of loans and receivables at the time of reclassification (if the financial asset had not been designated as available‑for‑sale) and where there is both the
intention and ability to hold that financial asset for the foreseeable future. Reclassification of a financial asset from the available-for-sale category to the held‑to‑maturity
category is permitted when the Group has the ability and intent to hold that financial asset to maturity.
Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortised cost as applicable. Effective interest rates for
financial assets reclassified to the loans and receivables and held‑to‑maturity categories are determined at the reclassification date. Any previous gain or loss on a
transferred asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the effective interest method or until
the asset becomes impaired. Any difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset using
the effective interest method.
When an impairment loss is recognised in respect of available-for-sale assets transferred, the unamortised balance of any available‑for‑sale reserve that remains in
equity is transferred to the income statement and recorded as part of the impairment loss.
(3) Loans and receivables

Loans and receivables include loans and advances to banks and customers and eligible assets including those transferred into this category out of the fair value
through profit or loss or available-for-sale financial assets categories. Loans and receivables are initially recognised when cash is advanced to the borrowers at fair
value inclusive of transaction costs or, for eligible assets transferred into this category, their fair value at the date of transfer. Financial assets classified as loans and
receivables are accounted for at amortised cost using the effective interest method (see accounting policy 2d) less provision for impairment (see accounting
policy 2h).
The Group has entered into securitisation and similar transactions to finance certain loans and advances to customers. In cases where the securitisation vehicles are
funded by the issue of debt, on terms whereby the majority of the risks and rewards of the portfolio of securitised lending are retained by the Group, these loans and
advances continue to be recognised by the Group, together with a corresponding liability for the funding.
26
(4) Borrowings
Borrowings (which include deposits from banks, customer deposits, debt securities in issue and subordinated liabilities) are recognised initially at fair value, being
their issue proceeds net of transaction costs incurred. These instruments are subsequently stated at amortised cost using the effective interest method.
Preference shares and other instruments which carry a mandatory coupon or are redeemable on a specific date are classified as financial liabilities. The coupon on
these instruments is recognised in the income statement as interest expense.
An exchange of financial liabilities on substantially different terms is accounted for as an extinguishment of the original financial liability and the recognition of a new
financial liability. The difference between the carrying amount of a financial liability extinguished and the new financial liability is recognised in profit or loss together
with any related costs or fees incurred.
When a financial liability is exchanged for an equity instrument, the new equity instrument is recognised at fair value and any difference between the original carrying
value of the liability and the fair value of the new equity is recognised in the profit or loss together with any related costs or fees incurred.
(5) Sale and repurchase agreements

Securities sold subject to repurchase agreements (repos) continue to be recognised on the balance sheet where substantially all of the risks and rewards are retained.
Funds received under these arrangements are included in deposits from banks, customer deposits, or trading liabilities. Conversely, securities purchased under
agreements to resell (reverse repos), where the Group does not acquire substantially all of the risks and rewards of ownership, are recorded as loans and receivables
or trading securities. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest
method.
Securities lent to counterparties are retained in the financial statements. Securities borrowed are not recognised in the financial statements, unless these are sold to
third parties, in which case the obligation to return them is recorded at fair value as a trading liability.
f Derivative financial instruments and hedge accounting

All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and using
valuation techniques, including discounted cash flow and option pricing models, as appropriate. Derivatives are carried in the balance sheet as assets when their fair
value is positive and as liabilities when their fair value is negative. Refer to note 3 (Critical accounting estimates and judgements: Fair value of financial instruments)
and note 45(3) (Financial instruments: Fair values of financial assets and liabilities) for details of valuation techniques and significant inputs to valuation models.
Changes in the fair value of any derivative instrument that is not part of a hedging relationship are recognised immediately in the income statement.
Derivatives embedded in financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the
host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value
recognised in the income statement.
The method of recognising the movements in the fair value of derivatives depends on whether they are designated as hedging instruments and, if so, the nature of
the item being hedged. Hedge accounting allows one financial instrument, generally a derivative such as a swap, to be designated as a hedge of another financial
instrument such as a loan or deposit or a portfolio of such instruments. At the inception of the hedge relationship, formal documentation is drawn up specifying the
hedging strategy, the hedged item and the hedging instrument and the methodology that will be used to measure the effectiveness of the hedge relationship in
offsetting changes in the fair value or cash flow of the hedged risk. The effectiveness of the hedging relationship is tested both at inception and throughout its life and
if at any point it is concluded that it is no longer highly effective in achieving its documented objective, hedge accounting is discontinued.
The Group designates certain derivatives as either: (1) hedges of the fair value of the particular risks inherent in recognised assets or liabilities (fair value hedges);
(2) hedges of highly probable future cash flows attributable to recognised assets or liabilities (cash flow hedges); or (3) hedges of net investments in foreign operations
(net investment hedges). These are accounted for as follows:
(1) Fair value hedges

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the changes in the
fair value of the hedged asset or liability that are attributable to the hedged risk; this also applies if the hedged asset is classified as an available-for-sale financial
asset. If the hedge no longer meets the criteria for hedge accounting, changes in the fair value of the hedged item attributable to the hedged risk are no longer
recognised in the income statement. The cumulative adjustment that has been made to the carrying amount of the hedged item is amortised to the income statement
using the effective interest method over the period to maturity.
(2) Cash flow hedges

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income in
the cash flow hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity
are reclassified to the income statement in the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge
no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income
statement when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative
gain or loss that was reported in equity is immediately transferred to the income statement.
(3) Net investment hedges

Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective
portion of the hedge is recognised in other comprehensive income, the gain or loss relating to the ineffective portion is recognised immediately in the income
statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed of. The hedging instruments used
in net investment hedges may include non-derivative liabilities as well as derivative financial instruments.
g Offset
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right of set-off and there is an intention
to settle on a net basis, or realise the asset and settle the liability simultaneously. In certain situations, even though master netting agreements exist, the lack of
management intention to settle on a net basis results in the financial assets and liabilities being reported gross on the balance sheet.
27
h Impairment of financial assets

(1) Assets accounted for at amortised cost
At each balance sheet date the Group assesses whether, as a result of one or more events occurring after initial recognition of the financial asset and prior to the
balance sheet date, there is objective evidence that a financial asset or group of financial assets has become impaired.
Where such an event has had an impact on the estimated future cash flows of the financial asset or group of financial assets, an impairment allowance is recognised.
The amount of impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the
asset’s original effective interest rate. If the asset has a variable rate of interest, the discount rate used for measuring the impairment allowance is the current effective
interest rate.
Subsequent to the recognition of an impairment loss on a financial asset or a group of financial assets, interest income continues to be recognised on an effective
interest rate basis, on the asset’s carrying value net of impairment provisions. If, in a subsequent period, the amount of the impairment loss decreases and the
decrease can be related objectively to an event occurring after the impairment was recognised, such as an improvement in the borrower’s credit rating, the allowance
is adjusted and the amount of the reversal is recognised in the income statement.
Impairment allowances are assessed individually for financial assets that are individually significant. Such individual assessment is used primarily for the Group’s
wholesale lending portfolios. Impairment allowances for portfolios of smaller balance homogenous loans such as most residential mortgages, personal loans and
credit card balances in the Group’s retail portfolios in both Retail and Wealth & International division that are below the individual assessment thresholds, and for
loan losses that have been incurred but not separately identified at the balance sheet date, are determined on a collective basis.
Individual assessment
In respect of individually significant financial assets in the Group’s wholesale lending portfolios, assets are reviewed on a regular basis and those showing potential
or actual vulnerability are placed on a watch list where greater monitoring is undertaken and any adverse or potentially adverse impact on ability to repay is used in
assessing whether an asset should be transferred to a dedicated Business Support Unit. Specific examples of trigger events that would lead to the initial recognition
of impairment allowances against lending to corporate borrowers (or the recognition of additional impairment allowances) include (i) trading losses, loss of business
or major customer of a borrower, (ii) material breaches of the terms and conditions of a loan facility, including non-payment of interest or principal, or a fall in the
value of security such that it is no longer considered adequate, (iii) disappearance of an active market because of financial difficulties, or (iv) restructuring a facility
with preferential terms to aid recovery of the lending (such as a debt for equity swap).
For such individually identified financial assets, a review is undertaken of the expected future cash flows which requires significant management judgement as to the
amount and timing of such cash flows. Where the debt is secured, the assessment reflects the expected cash flows from the realisation of the security, net of costs
to realise, whether or not foreclosure or realisation of the collateral is probable.
For impaired debt instruments which are held at amortised cost, impairment losses are recognised in subsequent periods when it is determined that there has been
a further negative impact on expected future cash flows. A reduction in fair value caused by general widening of credit spreads would not, of itself, result in additional
impairment.
Collective assessment
Impairment is assessed on a collective basis for (1) homogenous groups of loans that are not considered individually impaired, and (2) to cover losses which have
been incurred but have not yet been identified on loans subject to individual impairment.
Homogenous groups of loans

In respect of portfolios of smaller balance, homogenous loans, or otherwise where there is no objective evidence of individual impairment, the asset is included in a
group of financial assets with similar risk characteristics and collectively assessed for impairment. Segmentation takes into account factors, such as the type of asset,
industry sector, geographical location, collateral type, past-due status and other relevant factors. These characteristics are relevant to the estimation of future cash
flows for groups of such assets as they are indicative of the borrower’s ability to pay all amounts due according to the contractual terms of the assets being evaluated.
Generally, the impairment trigger used within the impairment calculation for a loan, or group of loans, is when they reach a pre-defined level of delinquency or where
the customer is bankrupt. Loans where the Group provides arrangements that forgive a portion of interest or principal are also deemed to be impaired and loans that
are originated to refinance currently impaired assets are also defined as impaired.
In respect of the Group’s secured mortgage portfolios, the impairment allowance is calculated based on a definition of impaired loans which are those six months or
more in arrears (or certain cases where the borrower is bankrupt, has entered into an Individual Voluntary Arrangement, or is in possession). The estimated cash
flows are calculated based on historical experience and are dependent on estimates of the expected value of collateral which takes into account expected future
movements in house prices, less costs to sell.
For unsecured personal lending portfolios, the impairment trigger is generally when the balance is two or more instalments in arrears or where the customer has
exhibited one or more of the impairment characteristics set out above. While the trigger is based on the payment performance or circumstances of each individual
asset, the assessment of future cash flows uses historical experience of cohorts of similar portfolios such that the assessment is considered to be collective. Future
cash flows are estimated on the basis of the contractual cash flows of the assets in the cohort and historical loss experience for similar assets. Historical loss
experience is adjusted on the basis of current observable data about economic and credit conditions (including unemployment rates and borrowers’ behaviour) to
reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the
historical period that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce
any differences between loss estimates and actual loss experience.
Incurred but not yet identified impairments

The collective provision also includes provision for inherent losses, that is losses that have been incurred but have not been identified at the balance sheet date. The
loans that are not currently recognised as impaired are grouped into homogenous portfolios by key risk drivers. Risk drivers for secured retail lending include the
current indexed loan-to-value, previous mortgage arrears, internal cross-product delinquency data and external credit bureau data; for unsecured retail lending they
include whether the account is up-to-date and, if not, the number of payments that have been missed; and for wholesale lending they include factors such as
observed default rates and loss given default. An assessment is made of the likelihood of each account becoming recognised as impaired within the loss emergence
period, with the economic loss that each portfolio is likely to generate were it to become impaired. The loss emergence period is determined by local management
28
for each portfolio and the Group has a range of loss emergence periods which are dependent upon the characteristics of the portfolios. Loss emergence periods are
reviewed regularly and updated when appropriate. In general the periods used across the Group vary between one month and twelve months based on historical
experience. Unsecured portfolios tend to have shorter loss emergence periods than secured portfolios.
Loan renegotiations and forbearance

In certain circumstances, the Group will renegotiate the original terms of a customer’s loan, either as part of an ongoing customer relationship or in response to
adverse changes in the circumstances of the borrower. There are a number of different types of loan renegotiation, including the capitalisation of arrears, payment
holidays, interest rate adjustments and extensions of the due date of payment. Where the renegotiated payments of interest and principal will not recover the original
carrying value of the asset, the asset continues to be reported as past due and is considered impaired. Where the renegotiated payments of interest and principal will
recover the original carrying value of the asset, the loan is no longer reported as past due or impaired provided that payments are made in accordance with the revised
terms. Renegotiation may lead to the loan and associated provision being derecognised and a new loan being recognised initially at fair value.
Write offs
A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from realising any available security have been
received or there is no realistic prospect of recovery and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off
decrease the amount of impairment losses recorded in the income statement. For both secured and unsecured retail balances, the write-off takes place only once an
extensive set of collections processes has been completed, or the status of the account reaches a point where policy dictates that forbearance is no longer appropriate.
For wholesale lending, a write-off occurs if the loan facility with the customer is restructured, the asset is under administration and the only monies that can be
received are the amounts estimated by the administrator, the underlying assets are disposed and a decision is made that no further settlement monies will be
received, or external evidence (for example, third party valuations) is available that there has been an irreversible decline in expected cash flows.
Debt for equity exchanges

Equity securities acquired in exchange for loans in order to achieve an orderly realisation are accounted for as a disposal of the loan and an acquisition of equity
securities, held as available‑for‑sale. Where control is obtained over an entity as a result of the transaction, the entity is consolidated; where the Group has significant
influence over an entity as a result of the transaction, the investment is accounted for by the equity method of accounting (see (a) above). Any subsequent impairment
of the assets or business acquired is treated as an impairment of the relevant asset or business and not as an impairment of the original instrument.
(2) Available-for-sale financial assets

The Group assesses, at each balance sheet date, whether there is objective evidence that an available-for-sale financial asset is impaired. In addition to the criteria
for financial assets accounted for at amortised cost set out above, this assessment involves reviewing the current financial circumstances (including creditworthiness)
and future prospects of the issuer, assessing the future cash flows expected to be realised and, in the case of equity shares, considering whether there has been a
significant or prolonged decline in the fair value of the asset below its cost. If an impairment loss has been incurred, the cumulative loss measured as the difference
between the acquisition cost (net of any principal repayment and amortisation) and the current fair value, less any impairment loss on that asset previously
recognised, is reclassified from equity to the income statement. For impaired debt instruments, impairment losses are recognised in subsequent periods when it is
determined that there has been a further negative impact on expected future cash flows; although a reduction in fair value caused by general widening of credit
spreads would not, of itself, result in additional impairment. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases
and the increase can be objectively related to an event occurring after the impairment loss was recognised, an amount not greater than the original impairment loss
is credited to the income statement; any excess is taken to other comprehensive income. Impairment losses recognised in the income statement on equity instruments
are not reversed through the income statement.
i Investment property
Investment property comprises freehold and long leasehold land and buildings that are held either to earn rental income or for capital appreciation or both. Investment
property is carried in the balance sheet at fair value, being the open market value as determined in accordance with the guidance published by the Royal Institution
of Chartered Surveyors. If this information is not available, the Group uses alternative valuation methods such as discounted cash flow projections or recent prices.
These valuations are reviewed at least annually by an independent valuation expert. Investment property being redeveloped for continuing use as investment
property, or for which the market has become less active, continues to be measured at fair value. Changes in fair value are recognised in the income statement as
net trading income.
j Tangible fixed assets

Tangible fixed assets are included at cost less accumulated depreciation. The value of land (included in premises) is not depreciated. Depreciation on other assets is
calculated using the straight-line method to allocate the difference between the cost and the residual value over their estimated useful lives, as follows:
Premises (excluding land):
––Freehold/long and short leasehold premises: shorter of 50 years and the remaining period of the lease
––Leasehold improvements: shorter of 10 years and, if lease renewal is not likely, the remaining period of the lease
Equipment:
––Fixtures and furnishings: 10-20 years

––Other equipment and motor vehicles: 2-8 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In the event that an
asset’s carrying amount is determined to be greater than its recoverable amount it is written down immediately. The recoverable amount is the higher of the asset’s
fair value less costs to sell and its value in use.
k Leases
(1) As lessee
The leases entered into by the Group are primarily operating leases. Operating lease rentals payable are charged to the income statement on a straight-line basis over
the period of the lease.
29
When an operating lease is terminated before the end of the lease period, any payment made to the lessor by way of penalty is recognised as an expense in the period
of termination.
(2) As lessor
Assets leased to customers are classified as finance leases if the lease agreements transfer substantially all the risks and rewards of ownership to the lessee but not
necessarily legal title. All other leases are classified as operating leases. When assets are subject to finance leases, the present value of the lease payments, together
with any unguaranteed residual value, is recognised as a receivable, net of provisions, within loans and advances to banks and customers. The difference between
the gross receivable and the present value of the receivable is recognised as unearned finance lease income. Finance lease income is recognised in interest income
over the term of the lease using the net investment method (before tax) so as to give a constant rate of return on the net investment in the leases. Unguaranteed
residual values are reviewed regularly to identify any impairment.
Operating lease assets are included within tangible fixed assets at cost and depreciated over their estimated useful lives, which equates to the lives of the leases, after
taking into account anticipated residual values. Operating lease rental income is recognised on a straight-line basis over the life of the lease.
The Group evaluates non-lease arrangements such as outsourcing and similar contracts to determine if they contain a lease which is then accounted for separately.
l Share-based compensation
Lloyds Banking Group operates a number of equity-settled, share-based compensation plans in respect of services received from certain of its employees. The value
of the employee services received in exchange for equity instruments granted under these plans is recognised as an expense over the vesting period of the
instruments. This expense is determined by reference to the fair value of the number of equity instruments that are expected to vest. The fair value of equity
instruments granted is based on market prices, if available, at the date of grant. In the absence of market prices, the fair value of the instruments at the date of grant
is estimated using an appropriate valuation technique, such as a Black-Scholes option pricing model. The determination of fair values excludes the impact of any
non‑market vesting conditions, which are included in the assumptions used to estimate the number of options that are expected to vest. At each balance sheet date,
this estimate is reassessed and if necessary revised. Any revision of the original estimate is recognised in the income statement over the remaining vesting period,
together with a corresponding adjustment to equity. Cancellations by employees of contributions to the Group's Save As You Earn plans are treated as non-vesting
conditions and in accordance with IFRS 2 (Revised) the Group recognises, in the year of cancellation, the amount of the expense that would have otherwise been
recognised over the remainder of the vesting period. Modifications are assessed at the date of modification and any incremental charges are charged to the income
statement over any remaining vesting period.
m Taxation
Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts
in the consolidated financial statements. However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than
a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates that have
been enacted or substantially enacted by the balance sheet date which are expected to apply when the related deferred tax asset is realised or the deferred tax liability
is settled.
Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised. Income tax
payable on profits is recognised as an expense in the period in which those profits arise. The tax effects of losses available for carry forward are recognised as an
asset when it is probable that future taxable profits will be available against which these losses can be utilised. Deferred and current tax related to gains and losses
on the fair value re-measurement of available-for-sale investments and cash flow hedges, where these gains and losses are recognised in other comprehensive
income, is also recognised in other comprehensive income. Such tax is subsequently transferred to the income statement together with the gain or loss.
Deferred and current tax assets and liabilities are offset when they arise in the same tax reporting group and where there is both a legal right of offset and the intention
to settle on a net basis or to realise the asset and settle the liability simultaneously.
n Foreign currency translation

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity
operates (the ‘functional currency’). The consolidated financial statements are presented in sterling, which is the Company’s functional and presentation currency.
Foreign currency transactions are translated into the appropriate functional currency using the exchange rates prevailing at the dates of the transactions. Foreign
exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as qualifying cash flow or net
investment hedges. Non-monetary assets that are measured at fair value are translated using the exchange rate at the date that the fair value was determined.
Translation differences on equities and similar non-monetary items held at fair value through profit and loss are recognised in profit or loss as part of the fair value
gain or loss. Translation differences on available-for-sale non-monetary financial assets, such as equity shares, are included in the fair value reserve in equity unless
the asset is a hedged item in a fair value hedge.
The results and financial position of all group entities that have a functional currency different from the presentation currency are translated into the presentation
currency as follows:
––The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on the acquisition of a foreign entity, are translated into sterling
at foreign exchange rates ruling at the balance sheet date.
––The income and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates
ruling at the dates of the transactions in which case income and expenses are translated at the dates of the transactions.
Foreign exchange differences arising on the translation of a foreign operation are recognised in other comprehensive income and accumulated in a separate
component of equity together with exchange differences arising from the translation of borrowings and other currency instruments designated as hedges of such
investments (see accounting policy 2f(3)). On disposal of a foreign operation, the cumulative amount of exchange differences relating to that foreign operation are
reclassified from equity and included in determining the profit or loss arising on disposal.
30
o Provisions and contingent liabilities

Provisions are recognised in respect of present obligations arising from past events where it is probable that outflows of resources will be required to settle the
obligations and they can be reliably estimated.
The Group recognises provisions in respect of vacant leasehold property where the unavoidable costs of the present obligations exceed anticipated rental income.
Contingent liabilities are possible obligations whose existence depends on the outcome of uncertain future events or those present obligations where the outflows of
resources are uncertain or cannot be measured reliably. Contingent liabilities are not recognised in the financial statements but are disclosed unless they are remote.
p Share capital
(1) Share issue costs
Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from
the proceeds.
(2) Dividends
Dividends paid on the Group’s ordinary shares are recognised as a reduction in equity in the period in which they are paid.
q Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise cash and non-mandatory balances with central banks and amounts due from banks
with a maturity of less than three months.
r Investment in subsidiaries
Investments in subsidiaries are carried at historical cost, less any provisions for impairment.
3 Critical accounting estimates and judgements
The preparation of the Group’s financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions in applying the
accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results
reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are
based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty in these financial
statements, which together are deemed critical to the Group’s results and financial position, are as follows.
Allowance for impairment losses on loans and receivables

At 31 December 2011 gross loans and receivables totalled £502,230 million (2010: £517,113 million) against which impairment allowances of £24,499 million
(2010: £26,607 million) had been made (see note 20). The Group’s accounting policy for losses arising on financial assets classified as loans and receivables is
described in note 2h; this note also provides an overview of the methodologies applied.
The allowance for impairment losses on loans and receivables is management’s best estimate of losses incurred in the portfolio at the balance sheet date. Impairment
allowances are made up of two components, those determined individually and those determined collectively.
Individual impairment allowances are generally established against the Group’s wholesale lending portfolios. The determination of individual impairment allowances
requires the exercise of considerable judgement by management involving matters such as local economic conditions and the resulting trading performance of the
customer, and the value of the security held, for which there may not be a readily accessible market. In particular, significant judgement is required by management
in the current economic environment in assessing the borrower’s cash flows and debt servicing capability together with the realisable value of real estate collateral.
The actual amount of the future cash flows and their timing may differ significantly from the assumptions made for the purposes of determining the impairment
allowances and consequently these allowances can be subject to variation as time progresses and the circumstances of the customer become clearer.
Collective impairment allowances are generally established for smaller balance homogenous portfolios such as the Retail portfolios. The collective impairment
allowance is also subject to estimation uncertainty and in particular is sensitive to changes in economic and credit conditions, including the interdependency of house
prices, unemployment rates, interest rates, borrowers’ behaviour, and consumer bankruptcy trends. It is, however, inherently difficult to estimate how changes in one
or more of these factors might impact the collective impairment allowance.
Given the relative size of the mortgage portfolio, a key variable is house prices which determine the collateral value supporting loans in such portfolios. The value of
this collateral is estimated by applying changes in house price indices to the original assessed value of the property. If average house prices were ten per cent lower
than those estimated at 31 December 2011, the impairment charge would increase by approximately £240 million in respect of UK mortgages and a further
£75 million in respect of Irish mortgages.
In addition, a collective unimpaired provision is made for loan losses that have been incurred but have not been separately identified at the balance sheet date. This
provision is sensitive to changes in the time between the loss event and the date the impairment is specifically identified. This period is known as the loss emergence
period. In the Group’s wholesale business, an increase of one month in the loss emergence period in respect of the loan portfolio assessed for collective unimpaired
provisions would result in an increase in the collective unimpaired provision of approximately £135 million (at 31 December 2010, a one month increase in the loss
emergence period would have increased the collective unimpaired provision by an estimated £278 million).
31
3 Critical accounting estimates and judgements (continued)
Fair value of financial instruments

In accordance with IFRS 7, the Group categorises financial instruments carried on the balance sheet at fair value using a three level hierarchy. Financial instruments
categorised as level 1 are valued using quoted market prices and therefore there is minimal judgement applied in determining fair value. However, the fair value of
financial instruments categorised as level 2 and, in particular, level 3 is determined using valuation techniques including discounted cash flow analysis and valuation
models. These valuation techniques involve management judgement and estimates, the extent of which depends on the complexity of the instrument and the
availability of market observable information.
Valuation techniques for level 2 financial instruments use inputs that are largely based on observable market data. Level 3 financial instruments are those where at
least one input which could have a significant effect on the instrument’s valuation is not based on observable market data. Determining the appropriate assumptions
to be used for level 3 financial instruments requires significant management judgement.
At 31 December 2011, the Group classified £2,608 million of financial assets and £48 million of financial liabilities as level 3. Further details of the Group’s level
3 financial instruments and the sensitivity of their valuation including the effect of applying reasonably possible alternative assumptions in determining their fair value
are set out in note 45.
Recoverability of deferred tax assets

At 31 December 2011 the Group carried deferred tax assets on its balance sheet of £4,050 million (2010: £4,826 million) and deferred tax liabilities of £1 million
(2010: £1 million) (note 34). This presentation takes into account the ability of the Group to net deferred tax assets and liabilities only where there is a legally
enforceable right of offset. Note 34 presents the Group’s deferred tax assets and liabilities by type. The largest category of deferred tax asset relates to tax losses carried
forward.
The recoverability of the Group's deferred tax assets in respect of carry forward losses is based on an assessment of future levels of taxable profit expected to arise
that can be offset against these losses. The Group's expectations as to the level of future taxable profits take into account the Group's long-term financial and strategic
plans, and anticipated future tax adjusting items.
In making this assessment account is taken of business plans, the five year board approved operating plan and the following future risk factors:
• The expected future economic outlook as set out in the Group Chief Executive’s Statement contained in the Annual Report of Lloyds Banking Group;
• The retail banking business disposal as required by the European Commission; and
• Future regulatory change.
The Group’s total deferred tax asset includes £3,563 million (2010 £3,896 million) in respect of trading losses carried forward. The tax losses have arisen in
individual legal entities and will be used as future taxable profits arise in those legal entities, though substantially all of the unused tax losses for which a deferred
tax asset has been recognised arise in Bank of Scotland plc. The deferred tax asset will be utilised over different time periods in each of the entities in which the tax
losses arise. The Group's assessment is that these tax losses will be fully used within eight years.
Under current UK tax law there is no expiry date for unused tax losses.
As disclosed in note 34, deferred tax assets totalling £570 million (2010: £597 million) have not been recognised in respect of certain capital losses carried forward,
trading losses carried forward (mainly in certain overseas companies) and unrelieved foreign tax credits as there are no predicted future capital or taxable profits
against which these losses can be recognised.
Payment protection insurance

The Group has charged a provision of £1,155 million in respect of payment protection insurance (PPI) policies as a result of discussions with the FSA and a judgment
handed down by the UK High Court (see note 35 for more information).
The provision represents management’s best estimate of the anticipated costs of related customer contact and/or redress, including administration expenses.
However, there are still a number of uncertainties as to the eventual costs from any such contact and/or redress given the inherent difficulties of assessing the impact
of detailed implementation of the FSA Policy Statement of 10 August 2010 for all PPI complaints, uncertainties around the ultimate emergence period for complaints,
the availability of supporting evidence and the activities of claims management companies, all of which will significantly affect complaints volumes, uphold rates and
redress costs.
The provision requires significant judgement by management in determining appropriate assumptions, which include the level of complaints, uphold rates, proactive
contact and response rates, Financial Ombudsman Service referral and uphold rates as well as redress costs for each of the many different populations of customers
identified by the Group in its analyses used to determine the best estimate of the anticipated costs of redress. If the level of complaints had been one percentage point
higher (lower) than estimated for all policies open within the last six years then the provision made in 2011 would have increased (decreased) by approximately
£25 million. There are a large number of inter-dependent assumptions under-pinning the provision; the above sensitivity assumes that all assumptions, other than
the level of complaints, remain constant. The sensitivity is, therefore, hypothetical and should be used with caution.
The Group will re-evaluate the assumptions underlying its analysis at each reporting date as more information becomes available. As noted above, there is inherent
uncertainty in making estimates; actual results in future periods may differ from the amount provided.
32
4 Segmental analysis
IFRS 8 ‘Operating Segments’ requires reporting of financial and descriptive information about operating segments which are based on how financial information is
reported and evaluated internally. The chief operating decision maker has been identified as the Group Executive Committee of Lloyds Banking Group. The Bank of
Scotland Group is managed on an entity basis and not by segment. The Group Executive Committee does not assess the Bank of Scotland Group’s performance and
allocate resources across any segments, accordingly no segmental information is provided. A brief overview of the Group’s sources of income is provided in the
Financial review. The ultimate parent undertaking, Lloyds Banking Group plc, produces consolidated accounts which set out the basis of the segments through which
it manages performance and allocates resources across the consolidated Lloyds Banking Group.
Geographical areas
The Group’s activities are focused in the UK and the analyses of income and assets below are based on the location of the branch or entity recording the income or assets.
2011 2010
UK Non-UK Total UK Non-UK Total
£m £m £m £m £m £m
Total income 7,359 1,235 8,594 10,683 1,622 12,305
Total assets 504,334 53,809 558,143 501,075 72,719 573,794
There was no individual non-UK country contributing more than 5 per cent of total income or total assets.
5 Net interest income

Weighted average
effective interest rate
2011 20101 2011 2010
% % £m £m
Interest and similar income:
Loans and advances to banks 1.05 1.08 790 671
Loans and advances to customers, excluding lease and hire purchase receivables 3.64 4.01 15,012 16,729
Debt securities held as loans and receivables 2.99 2.71 479 739
Lease and hire purchase receivables 3.21 4.41 174 24
Interest receivable on loans and receivables 3.23 3.59 16,455 18,163
Available-for-sale financial assets 3.30 1.79 293 339
Total interest and similar income 3.23 3.52 16,748 18,502
Interest and similar expense:
Deposits from banks, excluding liabilities under sale and repurchase agreements 0.94 1.26 (1,422) (1,727)
Customer deposits, excluding liabilities under sale and repurchase agreements 2.54 1.99 (5,660) (4,279)
Debt securities in issue 1.39 2.41 (1,241) (2,693)
Subordinated liabilities 3.64 2.32 (472) (430)
Liabilities under sale and repurchase agreements 2.15 1.11 (96) (548)
Total interest and similar expense 1.85 1.82 (8,891) (9,677)
Net interest income 7,857 8,825
During 2011 the Group has revised its treatment of offset accounts; average balances for 2010 have been restated accordingly.
1
Included within interest and similar income is £1,041 million (2010: £916 million) in respect of impaired financial assets. Net interest income also includes a
charge of £373 million (2010: £1,377 million) transferred from the cash flow hedging reserve.
6 Net fee and commission income

2011 2010
£m £m
Fee and commission income:
Current accounts 357 343
Credit and debit card fees 214 203
Other 637 735
Total fee and commission income 1,208 1,281
Fee and commission expense (286) (237)
Net fee and commission income 922 1,044
As discussed in accounting policy 2(d), fees and commissions which are an integral part of the effective interest rate form part of net interest income shown in note 5.
Fees and commissions relating to instruments that are held at fair value through profit or loss are included within net trading income shown in note 7.
33
7 Net trading income
2011 2010
£m £m
Foreign exchange translation gains 338 296
Gains on foreign exchange trading transactions 67 82
Total foreign exchange 405 378
Investment property (losses) gains (note 22) (17) 22
Securities and other (losses) gains (see below) (1,034) 371
Net trading income (646) 771
Securities and other (losses) gains comprise net (losses) gains arising on assets and liabilities held at fair value through profit or loss or for trading as follows:
2011 2010
£m £m
Net expense arising on assets designated at fair value through profit or loss:
Debt securities, loans and advances (198) (71)
Equity shares (44) (160)
Total net expense arising on assets held at fair value through profit or loss (242) (231)
Net (losses) gains on financial instruments held for trading (792) 602
Securities and other (losses) gains (1,034) 371
8 Other operating income

2011 2010
£m £m
Operating lease rental income 259 798
Rental income from investment properties 35 1
Other rents receivable 10 9
Gains on disposal of available-for-sale financial assets (note 39) 72 52
Liability management gains – 433
Other income 85 372
Total other operating income 461 1,665
During 2010, as part of the Lloyds Banking Group’s management of capital, the Group exchanged certain existing subordinated debt securities for new securities.
These exchanges resulted in a gain on extinguishment of the existing liabilities of £433 million in the year ended 31 December 2010, being the difference between
the carrying amount of the securities extinguished and the fair value of the new securities issued together with related fees and costs.
34
9 Operating expenses
2011 2010
£m £m
Staff costs:
Salaries 1,555 1,637
Social security costs 145 150
Pensions and other post-retirement benefit schemes 197 237
Restructuring costs 59 54
Other staff costs 70 161
2,026 2,239
Premises and equipment:
Rent and rates 255 260
Hire of equipment 2 4
Repairs and maintenance 35 37
Other 142 149
434 450
Other expenses:
Communications and data processing 234 261
Advertising and promotion 146 145
Professional fees 61 132
Payment protection insurance provision (note 35) 1,155 –
Financial services compensation scheme management expenses levy (note 44) 81 28
Customer goodwill payments provision (note 35) – 500
Other 440 506
2,117 1,572
Depreciation and amortisation:
Depreciation of tangible fixed assets (note 27) 320 825
Amortisation of other intangible assets (note 26) 16 24
336 849
Impairment of tangible fixed assets (note 27) 65 52
Total operating expenses 4,978 5,162
The average number of persons on a headcount basis employed by the Group during the year was as follows:
2011 2010
UK 47,465 48,560
Overseas 1,101 1,941
Total 48,566 50,501
Fees payable to the Bank’s auditors

During the year the auditors earned the following fees:
2011 2010
£m £m
Fees payable for the audit of the Bank’s current year annual report 4.6 3.8
Fees payable for other services:
Audit of the Bank’s subsidiaries pursuant to legislation 1.4 3.4
Other services supplied pursuant to legislation 0.3 0.3
Other services – audit-related fees 0.3 0.1
Services relating to taxation 0.5 0.3
Services relating to corporate finance transactions 0.5 –
All other services 0.2 –
Total fees payable to the Bank’s auditors by the Group 7.8 7.9
During the year, the auditors also earned fees payable by entities outside the consolidated Group in respect of the following:
2011 2010
£m £m
Reviews of the financial position of corporate and other borrowers 3.7 13.5
35
10 Impairment
2011 2010
£m £m
Impairment losses on loans and receivables (note 20):
Loans and advances to customers 6,961 10,786
Debt securities classified as loans and receivables 60 40
Total impairment losses on loans and receivables 7,021 10,826
Impairment of available-for-sale financial assets 78 100
Other credit risk provisions (note 35) 5 –
Total impairment charged to the income statement 7,104 10,926
11 Investments in joint ventures and associates
The Group’s share of results of and investments in joint ventures and associates comprises:
Joint ventures Associates Total
2011 2010 2011 2010 2011 2010
£m £m £m £m £m £m
Share of income statement amounts:
Income 313 314 160 131 473 445
Expenses (262) (208) (161) (91) (423) (299)
Impairment (20) (126) 1 (92) (19) (218)
Profit/loss before tax 31 (20) – (52) 31 (72)
Tax (4) (15) – (1) (4) (16)
Share of post-tax results 27 (35) – (53) 27 (88)
Share of balance sheet amounts:

Current assets 3,342 3,362 246 376 3,588 3,738
Non-current assets 2,119 2,836 976 1,184 3,095 4,020
Current liabilities (713) (583) (293) (433) (1,006) (1,016)
Non-current liabilities (4,471) (5,316) (904) (1,025) (5,375) (6,341)
Share of net assets at 31 December 277 299 25 102 302 401
Movements in investments over the year:

At 1 January 299 313 102 110 401 423
Additional investments 9 66 3 6 12 72
Disposals (47) (12) (79) (2) (126) (14)
Share of post-tax results 27 (35) – (53) 27 (88)
Dividends paid (5) (3) – (1) (5) (4)
Exchange and other adjustments (6) (30) (1) 42 (7) 12
Share of net assets at 31 December 277 299 25 102 302 401
During 2011, the Group recognised a net £8 million of losses of associates not previously recognised. The Group’s unrecognised share of losses of associates during
2010 was £8 million and of joint ventures is £85 million in 2011 (2010: £180 million). For entities making losses, subsequent profits earned are not recognised
until previously unrecognised losses are extinguished. The Group’s unrecognised share of losses net of unrecognised profits on a cumulative basis of associates is
£56 million (2010: £104 million) and of joint ventures is £299 million (2010: £339 million).
The Group’s most significant joint venture is Sainsbury’s Bank plc, a banking business with operations principally in the UK. Bank of Scotland plc has a 50 per cent
stake in the ordinary share capital of Sainsbury’s Bank plc, which makes up its statutory accounts to 31 December each year. All other interests in joint ventures are
held by subsidiaries. Where entities have statutory accounts drawn up to a date other than 31 December management accounts are used when accounting for them
by the Group.
36
12 Taxation
a Analysis of tax credit for the year

2011 2010
£m £m
UK corporation tax:
Current tax on loss for the year 637 (19)
Adjustments in respect of prior years (95) 49
542 30
Foreign tax:
Current tax on loss for the year 4 4
Adjustments in respect of prior years 24 28
28 32
Current tax credit (charge) 570 62
Deferred tax (note 34):
Origination and reversal of temporary differences 45 225
Reduction in UK corporation tax rate (350) (132)
Adjustments in respect of prior years 91 (87)
(214) 6
Tax credit 356 68
The tax credit is based on a UK corporation tax rate of 26.5 per cent (2010: 28.0 per cent).
b Factors affecting the tax credit for the year

A reconciliation of the credit that would result from applying the standard UK corporation tax rate to loss before tax to the actual tax credit for the year is given below:
2011 2010
£m £m
Loss before tax (3,461) (3,871)
Tax credit thereon at UK corporation tax rate of 26.5 per cent (2010: 28.0 per cent) 917 1,084
Factors affecting credit:
UK corporation tax rate change (350) (132)
Disallowed and non-taxable items (48) (36)
Overseas tax rate differences (8) 116
Gains exempted or covered by capital losses 60 172
Adjustments in respect of previous years 20 (10)
Effect of profit or loss in joint ventures and associates 7 (25)
Tax losses surrendered for no payment (34) (626)
Tax losses where no deferred tax recognised (246) (510)
Deferred tax on tax losses not previously recognised 40 –
Other items (2) 35
Tax credit on loss on ordinary activities 356 68
37
13 Trading and other financial assets at fair value through profit or loss
The Group The Bank

2011 2010 2011 2010
£m £m £m £m
Trading assets 21,840 24,274 21,840 24,268
Other financial assets at fair value through profit or loss 475 422 164 129
Total 22,315 24,696 22,004 24,397
These assets are comprised as follows:

2011 2010 2011 2010
Other Other Other Other
financial financial financial financial
assets at assets at assets at assets at
fair value fair value fair value fair value
Trading through Trading through Trading through Trading through
assets profit or loss assets profit or loss assets profit or loss assets profit or loss
£m £m £m £m £m £m £m £m
Loans and advances to customers 17,381 54 12,282 – 17,381 54 12,282 –
Loans and advances to banks 1,355 – 3,936 – 1,355 – 3,936 –
Debt securities:
Government securities 992 – 1,403 – 992 – 1,403 –
Bank and building society certificates of deposit 1,384 – 3,692 – 1,384 – 3,692 –
Asset-backed securities:
Other asset-backed securities 203 – 973 – 203 – 973 –
Corporate and other debt securities 301 135 1,755 101 301 34 1,755 101
2,880 135 7,823 101 2,880 34 7,823 101
Equity shares – 286 6 321 – 76 – 28
Treasury and other bills 224 – 227 – 224 – 227 –
Total 21,840 475 24,274 422 21,840 164 24,268 129
At 31 December 2011 £6,233 million (2010: £2,232 million) of trading and other financial assets at fair value through profit or loss of the Group and £6,018 million
(2010: £1,887 million) of the Bank had a contractual residual maturity of greater than one year.
Included in the amounts reported above are reverse repurchase agreements treated as collateralised loans with a carrying value of £18,729 million
(2010: £15,513 million) for the Group and Bank. Collateral is held with a fair value of £23,655 million (2010: £17,632 million) for the Group and Bank, all of
which the Group is able to repledge. At 31 December 2011, £20,055 million (2010: £7,261 million) had been sold or repledged by the Group and Bank.
For amounts included above which are subject to repurchase agreements see note 46.
14 Derivative financial instruments
The Group holds derivatives as part of the following strategies:

––Customer driven, where derivatives are held as part of the provision of risk management products to Group customers; and
––To manage and hedge the Group’s interest rate and foreign exchange risk arising from normal banking business. The hedge accounting strategy adopted by the
Group is to utilise a combination of fair value, cash flow and net investment hedge approaches as described in note 46.
Derivatives are classified as trading except those designated as effective hedging instruments which meet the criteria under IAS 39. Derivatives are held at fair value
on the Group’s balance sheet. A description of the methodology used to determine the fair value of derivative financial instruments and the effect of using reasonably
possible alternative assumptions for those derivatives valued using unobservable inputs is set out in note 45.
The principal derivatives used by the Group are as follows:
––Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an agreement between two parties to
exchange fixed and floating interest payments, based upon interest rates defined in the contract, without the exchange of the underlying principal amounts. Forward
rate agreements are contracts for the payment of the difference between a specified rate of interest and a reference rate, applied to a notional principal amount at
a specific date in the future. An interest rate option gives the buyer, on payment of a premium, the right, but not the obligation, to fix the rate of interest on a future
loan or deposit, for a specified period and commencing on a specified future date.
––Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign exchange contract is an agreement to
buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment
obligations denominated in different currencies; the exchange of principal can be notional or actual. A currency option gives the buyer, on payment of a premium,
the right, but not the obligation, to sell specified amounts of currency at agreed rates of exchange on or before a specified future date.
––Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own exposure to credit risk. A credit default
swap is a swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific payment should a negative
credit event take place.
38
14 Derivative financial instruments (continued)
––Equity derivatives are also used by the Group as part of its equity-based retail product activity to eliminate the Group’s exposure to fluctuations in various
international stock exchange indices. Index-linked equity options are purchased which give the Group the right, but not the obligation, to buy or sell a specified
amount of equities, or basket of equities, in the form of published indices on or before a specified future date.
The fair values and notional amounts of derivative instruments are set out in the following table:
2011 2010
Contract/ Contract/
notional Fair value Fair value notional Fair value Fair value
amount assets liabilities amount assets liabilities
The Group £m £m £m £m £m £m
Trading
Exchange rate contracts:
Spot, forwards and futures 15,353 112 55 22,664 193 218
Currency swaps 81,524 1,617 2,610 98,335 3,126 2,568
Options purchased 59 1 – 117 2 –
Options written 138 – 4 97 – 2
97,074 1,730 2,669 121,213 3,321 2,788
Interest rate contracts:
Interest rate swaps 891,880 23,033 23,706 1,230,066 18,292 18,670
Forward rate agreements 215,904 80 66 746,795 238 216
Options purchased 16,349 823 – 16,230 565 –
Options written 17,275 – 1,002 24,876 – 708
Futures 113,213 – – 21,256 3 –
1,254,621 23,936 24,774 2,039,223 19,098 19,594
Credit derivatives 256 10 75 1,377 51 16
Equity and other contracts 9,511 1,018 811 12,646 913 804
Total derivative assets/liabilities held for trading 1,361,462 26,694 28,329 2,174,459 23,383 23,202
Hedging
Derivatives designated as fair value hedges:
Interest rate swaps 37,369 4,166 684 42,991 3,432 619
Cross currency swaps 24,291 557 258 15,290 631 156
61,660 4,723 942 58,281 4,063 775
Derivatives designated as cash flow hedges:
Interest rate swaps 159,964 4,690 5,901 98,683 1,772 3,073
Options – – – – – –
Futures 103,467 – – 1,299 1 –
282,610 4,866 5,991 117,893 2,005 3,291
Total derivative assets/liabilities held for hedging 344,270 9,589 6,933 176,174 6,068 4,066
Total recognised derivative assets/liabilities 1,705,732 36,283 35,262 2,350,633 29,451 27,268
39
Hedged cash flows

For designated cash flow hedges the following table shows when the Group’s hedged cash flows are expected to occur and when they will affect income.
10-20 Over 20
0-1 years 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years years years Total
2011 £m £m £m £m £m £m £m £m £m
Hedged forecast cash flows expected to occur:
Forecast receivable cash flows 52 139 377 277 136 261 5 28 1,275
Forecast payable cash flows (154) (173) (94) (65) (28) (119) (409) (55) (1,097)
Hedged forecast cash flows affect profit or loss:

Over 20
0-1 years 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years 10-20 years years Total
2010 £m £m £m £m £m £m £m £m £m
Forecast payable cash flows (85) (34) (137) (82) (58) (175) (286) (57) (914)

There were no transactions for which cash flow hedge accounting had to be ceased in 2011 or 2010 as a result of the highly probable cash flows no longer being
expected to occur.
At 31 December 2011 £32,909 million of total recognised derivative assets of the Group and £31,753 million of total recognised derivative liabilities of the Group
(2010: £26,773 million of assets and £24,066 million of liabilities) had a contractual residual maturity of greater than one year.
40
2011 2010
Contract/ Contract/
notional Fair value Fair value notional Fair value Fair value
amount assets liabilities amount assets liabilities
The Bank £m £m £m £m £m £m
Trading
Exchange rate contracts:
Spot, forwards and futures 11,146 111 112 14,576 203 284
Currency swaps 77,113 1,487 2,528 71,917 1,355 2,517
Options purchased 59 1 – 102 2 –
Options written 138 – 4 95 – 2
88,456 1,599 2,644 86,690 1,560 2,803
Interest rate contracts:
Interest rate swaps 886,566 23,006 23,662 1,018,133 18,286 18,674
Forward rate agreements 214,558 80 66 729,593 238 216
Options purchased 16,341 823 13 14,778 565 –
Options written 17,267 – 989 22,609 – 708
Futures 113,213 – – 21,256 3 –
1,247,945 23,909 24,730 1,806,369 19,092 19,598
Credit derivatives 204 10 95 1,377 51 16
Equity and other contracts 9,453 712 524 8,623 591 503
Total derivative assets/liabilities held for trading 1,346,058 26,230 27,993 1,903,059 21,294 22,920
Hedging
Derivatives designated as fair value hedges:
Interest rate swaps 37,369 4,166 683 41,311 3,432 619
61,660 4,723 941 53,991 4,063 775
Derivatives designated as cash flow hedges:
Interest rate swaps 159,964 4,690 5,901 97,812 1,772 3,073
Options – – – – – –
Futures 103,467 – – 1,299 1 –
282,610 4,867 5,992 117,022 2,005 3,291
Total derivative assets/liabilities held for hedging 344,270 9,590 6,933 171,013 6,068 4,066
Total recognised derivative assets/liabilities 1,690,328 35,820 34,926 2,074,072 27,362 26,986
41
Hedged cash flows

For designated cash flow hedges the following table shows when the Bank’s hedged cash flows are expected to occur and when they will affect income.
10-20 Over 20
0-1 years 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years years years Total
2011 £m £m £m £m £m £m £m £m £m

Over 20
0-1 years 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years 10-20 years years Total
2010 £m £m £m £m £m £m £m £m £m

There were no transactions for which cash flow hedge accounting had to be ceased in 2011 or 2010 as a result of the highly probable cash flows no longer being
expected to occur.
At 31 December 2011 £32,509 million of total recognised derivative assets of the Bank and £31,402 million of total recognised derivative liabilities of the Bank
(2010: £24,748 million of assets and £23,777 million of liabilities) had a contractual residual maturity of greater than one year.
The principal amount of the contract does not represent the Group’s real exposure to credit risk which is limited to the current cost of replacing contracts with a
positive value to the Group and Bank should the counterparty default. To reduce credit risk the Group uses a variety of credit enhancement techniques such as netting
and collateralisation, where security is provided against the exposure. Further details are provided in note 46.
15 Loans and advances to banks

The Group The Bank
2011 2010 2011 2010

£m £m £m £m
Lending to banks 85,854 55,053 85,801 55,053
Money market placements with banks 3,636 6,296 3,469 5,971
Total loans and advances to banks 89,490 61,349 89,270 61,024
No impairment allowances are held against these exposures.
At 31 December 2011, for both the Group and the Bank, £50,614 million (2010: £11,435 million) of loans and advances to banks had a contractual residual
maturity of greater than one year.
Included in the amounts reported above are reverse repurchase agreements treated as collateralised loans with a carrying value of £2,950 million for the Group and
Bank (2010: £20,664 million for the Group and Bank). Collateral is held with a fair value of £2,950 million for the Group and Bank (2010: £20,626 million for
the Group and Bank), all of which the Group and Bank are able to repledge.
Included in the amounts reported above in 2010 are collateral balances in the form of cash provided in respect of reverse repurchase agreements amounting to £nil
for the Group and Bank (2010: £4 million for the Group and Bank).
42
16 Loans and advances to customers

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Agriculture, forestry and fishing 588 602 506 579
Energy and water supply 1,670 1,145 1,365 1,133
Manufacturing 2,946 3,881 2,426 3,801
Construction 6,818 6,983 5,733 6,725
Transport, distribution and hotels 20,135 23,232 19,536 21,104
Postal and telecommunications 357 1,032 282 1,031
Property companies 42,418 58,092 41,720 54,172
Financial, business and other services 33,077 32,029 30,526 27,474
Personal:
Mortgages 243,222 246,690 232,118 234,793
Other 12,920 16,974 11,250 14,242
Lease financing 3,840 4,458 56 171
Hire purchase 772 1,358 235 718
Due from fellow Group undertakings 30,943 34,365 62,181 72,407
Total loans and advances to customers before allowance for impairment losses 399,706 430,841 407,934 438,350
Allowance for impairment losses (note 20) (23,351) (25,316) (21,750) (22,722)
Total loans and advances to customers 376,355 405,525 386,184 415,628
At 31 December 2011 £301,274 million (2010: £320,341 million) of loans and advances to customers of the Group and £311,257 million (2010: £320,931 million)
of the Bank had a contractual residual maturity of greater than one year.
Included in the amounts reported above are reverse repurchase agreements treated as collateralised loans with a carrying value of £14,250 million for the Group
and the Bank (2010: £2,579 for the Group and Bank). Collateral is held with a fair value of £14,254 million for the Group and Bank (2010: £2,477 million for
the Group and Bank), all of which the Group and Bank are able to repledge.
Included in the amounts reported above are collateral balances in the form of cash provided in respect of reverse repurchase agreements amounting to £34 million
for the Group and the Bank (2010: £42 million for the Group and Bank).
Loans and advances to customers include finance lease receivables, which may be analysed as follows:
The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Gross investment in finance leases, receivable:
Not later than 1 year 497 614 29 74
Later than 1 year and not later than 5 years 1,293 1,395 18 97
Later than 5 years 2,184 2,581 9 –
3,974 4,590 56 171
Unearned future finance income on finance leases (134) (132) – –
Net investment in finance leases 3,840 4,458 56 171
The net investment in finance leases represents amounts recoverable as follows:

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Later than 1 year and not later than 5 years 1,215 1,224 18 97
Later than 5 years 2,181 2,563 9 –
Net investment in finance leases 3,840 4,458 56 171
Equipment leased to customers under finance leases primarily relates to structured financing transactions to fund the purchase of aircraft, ships and other large
individual value items. During 2011 and 2010 no contingent rentals in respect of finance leases were recognised in the income statement. The allowance for
uncollectable finance lease receivables included in the allowance for impairment losses is £89 million for the Group (2010: £227 million).
The unguaranteed residual values included in finance lease receivables were as follows:
The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Not later than 1 year 35 34 3 –
Later than 1 year and not later than 5 years 73 57 8 –
Later than 5 years 12 14 1 –
Total unguaranteed residual values 120 105 12 –
43
17 Securitisation and covered bonds
Securitisation programmes
Loans and advances to customers and debt securities classified as loans and receivables include loans securitised under the Group’s securitisation programmes, the
majority of which have been sold by Group companies to bankruptcy-remote special purpose entities (SPEs). As the SPEs are funded by the issue of debt on terms
whereby the majority of the risks and rewards of the portfolio are retained by the Group company, the SPEs are consolidated fully and all of these loans are retained
on the Group’s balance sheet, with the related notes in issue included within debt securities in issue. In addition to the SPEs described below, the Group sponsors
a conduit programme, Grampian (note 18).
Covered bond programmes

Certain loans and advances to customers have been assigned to bankruptcy remote limited liability partnerships to provide security for issues of covered bonds by
the Group. The Group retains all of the risks and rewards associated with these loans and the partnerships are consolidated fully with the loans retained on the
Group’s balance sheet and the related covered bonds in issue included within debt securities in issue.
The Group’s principal securitisation and covered bond programmes, together with the balances of the advances subject to these arrangements and the carrying value
of the notes in issue at 31 December, are listed below. The notes in issue are reported in note 32.
2011 2010
Loans and Loans and
advances Notes in advances Notes in
securitised issue securitised issue
£m £m £m £m
Securitisation programmes
UK residential mortgages 91,246 68,425 102,801 83,367
US residential mortgage-backed securities 4,659 6,351 7,197 7,221
Irish residential mortgages 5,531 5,661 6,061 6,191
Credit card receivables 6,792 4,810 7,372 3,856
Dutch residential mortgages 4,960 4,817 4,551 4,415
Personal loans – – 3,012 2,011
Commercial loans 680 631 667 633
Motor vehicle loans 1,573 1,341 926 975
115,441 92,036 132,587 108,669
Less held by the Group (65,118) (78,686)
Total securitisation programmes (note 32) 26,918 29,983
Covered bond programmes

Residential mortgage-backed 48,521 38,882 55,032 44,271
Social housing loan-backed 3,370 2,605 3,377 2,400
51,891 41,487 58,409 46,671
Less held by the Group (13,515) (17,239)
Total covered bond programmes (note 32) 27,972 29,432
Total securitisation and covered bond programmes 54,890 59,415
Cash deposits of £13,381 million (2010: £25,139 million) held by the Group are restricted in use to repayment of the debt securities issued by the SPEs, covered
bonds issued by Bank of Scotland plc and other legal obligations.
18 Special purpose entities
In addition to the SPEs discussed in note 17, which are used for securitisation and covered bond programmes, the Group sponsors an asset-backed conduit,
Grampian, which invests in debt securities. All of the external assets in this conduit are consolidated in the Group’s financial statements. The total consolidated
exposures in this conduit are set out in the table below:
At 31 December 2011 £m
Loans and advances 197
Debt securities:
Classified as loans and receivables – asset-backed securities 2,004
Classified as available-for-sale financial assets – asset-backed securities 796
Total debt securities 2,800
Total assets 2,997
At 31 December 2010 £m
Debt securities classified as loans and receivables – asset-backed securities 6,967
44
19 Debt securities classified as loans and receivables
Debt securities accounted for as loans and receivables comprise:

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Mortgage-backed securities 7,258 12,276 12,454 10,684
Other asset-backed securities 4,738 11,989 3,901 7,749
Corporate and other debt securities 1,038 658 185 269
Total debt securities classified as loans and receivables before allowance for impairment losses 13,034 24,923 16,540 18,702
Allowance for impairment losses (note 20) (1,148) (1,291) (1,133) (1,269)
Total debt securities classified as loans and receivables 11,886 23,632 15,407 17,433
At 31 December 2011, £11,417 million (2010: £23,572 million) of debt securities designated as loans and receivables of the Group and £12,776 million
(2010: £17,433 million) of the Bank had a contractual residual maturity of greater than one year.
20 Allowance for impairment losses on loans and receivables

Loans and
advances to Debt
customers securities Total
The Group £m £m £m
Balance at 1 January 2010 21,272 1,915 23,187
Exchange and other adjustments 330 82 412
Advances written off (6,605) (746) (7,351)
Recoveries of advances written off in previous years 57 – 57
Unwinding of discount (375) – (375)
Charge to the income statement (note 10) 10,786 40 10,826
Disposals of subsidiary undertakings (149) – (149)
Balance at 31 December 2010 25,316 1,291 26,607
Exchange and other adjustments (385) 11 (374)
Recoveries of advances written off in previous years 58 8 66
Charge to the income statement (note 10) 6,961 60 7,021
At 31 December 2011 23,351 1,148 24,499
Of the Group’s total allowance in respect of loans and advances to customers, £21,876 million (2010: £22,086 million) related to lending that had been determined
to be impaired (either individually or on a collective basis) at the reporting date.
Of the total allowance in respect of loans and advances to customers, £4,075 million (2010: £4,900 million) was assessed on a collective basis.
Loans and
advances to Debt
customers securities Total
The Bank £m £m £m
Balance at 1 January 2010 18,741 1,527 20,268
Exchange and other adjustments (2) 61 59
Charge to the income statement 5,069 100 5,169
Adjustment on merger by absorption of Bank of Scotland (Ireland) Limited (note 24) 7,763 – 7,763
Balance at 31 December 2010 22,722 1,269 23,991
Exchange and other adjustments (352) 8 (344)
Charge to the income statement 5,494 19 5,513
At 31 December 2011 21,750 1,133 22,883
Of the Bank’s total allowance in respect of loans and advances to customers, £20,490 million (2010: £19,758 million) related to lending that had been determined
to be impaired (either individually or on a collective basis) at the reporting date.
Of the total allowance in respect of loans and advances to customers, £3,611 million (2010: £4,383 million) was assessed on a collective basis.
45
21 Available-for-sale financial assets

2011 2010
The Group £m £m
Debt securities:
Government securities 75 79
Bank and building society certificates of deposit 32 129
Mortgage-backed securities 789 15
Other asset-backed securities 83 181
Corporate and other debt securities 5,429 11,368
6,408 11,772
Equity shares 1,880 2,167
Treasury bills and other bills – 483
Total available-for-sale financial assets 8,288 14,422
2011 2010
The Bank £m £m
Debt securities:
Government securities 75 78
Bank and building society certificates of deposit 32 129
Other asset-backed securities 301 945
Corporate and other debt securities 5,435 10,789
5,843 11,941
Equity shares 1,053 1,083
Treasury bills and other bills – 483
Total available-for-sale financial assets 6,896 13,507
At 31 December 2011 £7,144 million (2010: £10,086 million) of available-for-sale financial assets of the Group and £5,752 million (2010: £9,853 million) of the
Bank had a contractual residual maturity of greater than one year.
All assets have been individually assessed for impairment. The criteria used to determine whether an impairment loss has been incurred are disclosed in accounting
policy 2h. Included in available-for-sale financial assets at 31December 2011 are debt securities individually determined to be impaired whose gross amount before
impairment allowances was £2 million (2010: £160 million) and in respect of which no collateral was held.
22 Investment properties of the Group

2011 2010
£m £m
At 1 January 789 30
Exchange and other adjustments (7) (6)
Additions:
Acquisitions of new properties – 2
Consolidation of new subsidiary undertakings 920 801
Additional expenditure on existing properties 1 1
Total additions 921 804
Disposals (501) (61)
Changes in fair value (note 7) (17) 22
At 31 December 1,185 789
The investment properties are valued at least annually at open-market value, by independent, professionally qualified valuers, who have recent experience in the
location and categories of the investment properties being valued.
46
23 Investment in subsidiary undertakings

2011 2010
£m £m
At 1 January 1,540 2,451
Exchange and other adjustments – (86)
Acquisition of subsidiary 50 –
Additional capital injections and transfers 465 4,283
Disposals (141) –
Capital repayment (75) –
Impairment (465) (5,108)
At 31 December 1,374 1,540
During 2011, the Bank's investment in Scottish International Finance Limited has been reviewed and determined to be impaired; as a consequence it was written
down to nil and £465 million charged to the Bank’s income statement. In 2010, a reassessment of the carrying value of the Bank’s investments in Bank of Scotland
(Ireland) and HBOS Australia, and taking into account the merger of Bank of Scotland (Ireland) Limited into the Bank (see note 24), resulted in the recognition of
an impairment charge of £5,108 million which represented a full write down of those investments.
Impairment was determined based on the fair value less cost to sell and was determined by using a discounted cash flow valuation technique. This calculation uses
projections of future cash flows based on management’s plans covering a five-year period. These cash flows are based on past experience and have been adjusted
to take into account expected future market conditions. Cash flows beyond the five-year period have been extrapolated using a steady 2.4 per cent rate of increase.
The expected cash flows have been discounted at a rate of 17.75 per cent (pre-tax) which has been determined to be in line with available market information.
The principal group undertaking, which has prepared accounts to 31 December and whose results are included in the consolidated accounts of Bank of Scotland
plc, is:
Country of registration/ Percentage of equity share
incorporation capital and voting rights held Nature of business
Uberior Investments plc UK 100% Investment holding
The principal area of operation for this group undertaking is its country of registration/incorporation.
In November 2009, as part of the restructuring plan that was a requirement for European Community (EC) approval of state aid received by the Group, Lloyds Banking
Group agreed to suspend the payment of coupons and dividends on certain of the Group preference shares and preferred securities for the two year period from
31 January 2010 to 31 January 2012. The Group has agreed to temporarily suspend and/or waive dividend payments on certain preference shares which have been
issued intra-group. Consequently, in accordance with the terms of some of these instruments, subsidiaries may be prevented from making dividend payments on
ordinary shares during this period. In addition, certain subsidiary companies currently have insufficient distributable reserves to make dividend payments.
Subject to the foregoing, there were no further significant restrictions on any of the Bank’s subsidiaries in paying dividends or repaying loans and advances. All
regulated subsidiaries are required to maintain capital at levels agreed with the regulators; this may impact those subsidiaries’ ability to make distributions.
24 Merger of Bank of Scotland (Ireland) Limited into the Bank in 2010
On 31 December 2010, the Bank’s subsidiary, Bank of Scotland (Ireland) Limited, was merged into the Bank by virtue of a merger by absorption of a wholly-owned
subsidiary pursuant to the Companies (Cross-Border Mergers) Regulations 2007. As a consequence of the merger, all of the assets and liabilities of Bank of Scotland
(Ireland) Limited were transferred to the Bank and Bank of Scotland (Ireland) Limited was dissolved without going into liquidation. Consideration for the merger was
nil and the reserve arising on transfer was reduced by the carrying value of most of the Bank’s investment in Bank of Scotland (Ireland) Limited, although this had
already been written down to nil value. The assets and liabilities transferred were as follows:
2010
£m
Loans and advances to customers (net of impairment allowances of £7,763 million) 19,643

Available-for-sale financial assets 1,498
Net funding from the Bank no longer required (19,354)
Other net liabilities (240)
1,547
Consideration paid –
1,547
Reduction in the Bank’s investment in Bank of Scotland (Ireland) Limited –
Net amount arising from transfer credited to retained profits in 2010 1,547
In accordance with the accounting treatment available under IFRS 3 (Revised) for business combinations involving entities under common control, Bank of Scotland
plc was not required to fair value the Bank of Scotland (Ireland) Limited business at the date of merger. Instead, the assets and liabilities were incorporated at the
amounts at which they were recorded within the Bank of Scotland Group at that date.
The Bank’s investment in Bank of Scotland (Ireland) Limited had previously been held via an intermediate holding company, Scotland International Finance BV, but
this investment was transferred under the direct ownership of the Bank on 17 September 2010. As disclosed in note 23, prior to the merger of Bank of Scotland
(Ireland) Limited into the Bank, the Bank wrote down its investment in the subsidiary by £3,023 million.
47
25 Goodwill
The Group The Bank
2011 2010 2011 2010
£m £m £m £m
At 1 January 376 376 376 376
Adjustment on acquisition 9 – – –
At 31 December 385 376 376 376
Cost1 953 944 426 426

Accumulated impairment losses (568) (568) (50) (50)
At 31 December 385 376 376 376
For acquisitions made prior to 1 January 2004, the date of transition to IFRS, cost is net of amounts amortised up to 31 December 2003.
1
The goodwill held in the Group’s and the Bank’s balance sheet, which relates to retail banking operations, is tested at least annually for impairment. For the purposes
of impairment testing the goodwill is allocated to the appropriate cash generating unit, which is principally the retail banking activities. This compares the recoverable
amount, being the higher of a cash-generating unit’s fair value less costs to sell and its value in use, with the carrying value. When this indicates that the carrying
value is not recoverable it is written down through the income statement as goodwill impairment.
The recoverable amount of goodwill carried at 31 December 2011 has been based upon value in use. This calculation uses cash flow projections based upon the
Group’s business plans where the main assumptions relate to the current economic outlook and opinions in respect of economic growth, unemployment, property
markets, interest rates and credit quality. Cash flows for the period subsequent to the term of the business plan are extrapolated using a growth rate of 2.4 per cent
reflecting management’s view of the expected future long-term trend in growth rate of the respective economies concerned, predominantly being in the UK, and the
long term performances of the businesses concerned. The discount rate used in discounting the projected cash flows is 12.5 per cent (post-tax) reflecting, inter alia,
the perceived risks within those businesses. Management believes that any reasonably possible change in the key assumptions would not cause the recoverable
amount to fall below the balance sheet carrying value.
26 Other intangible assets

The Group The Bank
Capitalised Capitalised
software software
enhance- enhance-
Brands ments Total ments
£m £m £m £m
Cost:
At 1 January 2010 10 288 298 277
Additions – 21 21 22
Disposals – (30) (30) (22)
At 31 December 2010 10 279 289 277
Additions – 28 28 22
Disposals – (12) (12) (12)
At 31 December 2011 10 295 305 287
Accumulated amortisation:
At 1 January 2010 7 200 207 192
Exchange and other adjustments 3 (3) – 4
Charge for the year – 24 24 23
At 31 December 2010 10 221 231 219
Exchange and other adjustments – 1 1 1
Charge for the year (note 9) – 16 16 16
Disposals – (12) (12) (12)
At 31 December 2011 10 226 236 224
Balance sheet amount at 31 December 2011 – 69 69 63
Balance sheet amount at 31 December 2010 – 58 58 58
Capitalised software enhancements principally comprise identifiable and directly associated internal staff and other costs.
48
27 Tangible fixed assets

The Group The Bank
Operating Total Operating Total
lease tangible lease tangible
Premises Equipment assets fixed assets Premises Equipment assets fixed assets
£m £m £m £m £m £m £m £m
Cost:
At 1 January 2010 1,456 2,606 5,223 9,285 1,355 2,260 102 3,717
Exchange and other adjustments – 7 12 19 – – – –
Transfer to fellow Group undertakings – – (1,263) (1,263) – – – –
Additions 52 125 782 959 51 201 – 252
Disposals (69) (261) (1,248) (1,578) (42) (72) (89) (203)
At 31 December 2010 1,439 2,477 3,506 7,422 1,364 2,389 13 3,766
Exchange and other adjustments – (8) (28) (36) – (16) – (16)
Additions 35 143 184 362 33 133 – 166
Disposals (60) (131) (1,489) (1,680) (52) (122) (13) (187)
Disposal of businesses (14) (7) (330) (351) – – – –
At 31 December 2011 1,400 2,474 1,843 5,717 1,345 2,384 – 3,729
Accumulated depreciation and impairment:

At 1 January 2010 700 1,929 1,753 4,382 673 1,700 – 2,373
Exchange and other adjustments – 4 39 43 – – – –
Transfer to fellow Group undertakings – – (258) (258) – – – –
Impairment charged to the income statement (note 9) – 52 – 52 – – – –
Depreciation charge for the year (note 9) 54 246 525 825 51 228 – 279
Disposals (20) (319) (716) (1,055) (6) (58) – (64)
At 31 December 2010 734 1,912 1,343 3,989 718 1,870 – 2,588
Exchange and other adjustments (1) 11 (11) (1) – 4 – 4
Impairment charged to the income statement (note 9) – 65 – 65 – 65 – 65
Depreciation charge for the year (note 9) 55 108 157 320 54 97 – 151
Disposals (4) (90) (725) (819) (4) (87) – (91)
Disposal of businesses (3) (6) (195) (204) – – – –
At 31 December 2011 781 2,000 569 3,350 768 1,949 – 2,717
Balance sheet amount at 31 December 2011 619 474 1,274 2,367 577 435 – 1,012
Balance sheet amount at 31 December 2010 705 565 2,163 3,433 646 519 13 1,178
At 31 December the future minimum rentals receivable by the Group under non-cancellable operating leases were as follows:
2011 2010
£m £m
Receivable within 1 year 172 480
1 to 5 years 464 986
Over 5 years 626 588
Total future minimum rentals receivable 1,262 2,054
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. During 2011 and 2010 no contingent rentals in
respect of operating leases were recognised in the income statement.
In addition, total future minimum sub-lease income of £nil for the Group and £45 million for the Bank at 31 December 2011 (2010: £nil for the Group and the
Bank) is expected to be received under non-cancellable sub-leases of the Group’s premises.
28 Other assets

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Settlement balances 171 419 171 419
Other assets and prepayments 903 1,509 769 1,265
Total other assets 1,074 1,928 940 1,684
49
29 Deposits from banks

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Liabilities in respect of securities sold under repurchase agreements 952 6,155 652 5,855
Other deposits from banks 149,118 136,901 148,956 135,984
Total deposits from banks 150,070 143,056 149,608 141,839
At 31 December 2011 £120,189 million (2010: £25,928 million) of deposits from banks of the Group and £120,188 million (2010: £24,783 million) of the
Bank had a contractual residual maturity of greater than one year.
Included in the amounts reported above are deposits held as collateral for facilities granted, with a carrying value of £28,040 million (2010: £55,394 million) for
the Group and Bank and a fair value of £28,180 million (2010: £56,450 million for the Group and Bank).
30 Customer deposits

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Non-interest bearing current accounts 11,204 5,646 11,218 5,645
Interest bearing current accounts 26,093 35,776 26,093 35,746
Savings and investment accounts 147,004 137,188 146,980 137,188
Liabilities in respect of securities sold under repurchase agreements 3,662 8,079 3,662 8,079
Other customer deposits 47,892 54,828 72,279 85,242
Total customer deposits 235,855 241,517 260,232 271,900
At 31 December 2011 £57,132 million (2010: £31,857 million) of customer deposits of the Group and £77,063 million (2010: £35,497 million) of the Bank
had a contractual residual maturity of greater than one year.
Included in the amounts reported above are deposits held as collateral for facilities granted, with a carrying value of £5,306 million (2010: £8,279 million) for the
Group and Bank and a fair value of £5,655 million (2010: £8,455 million) for the Group and the Bank.
Included in the amounts reported above are collateral balances in the form of cash provided in respect of repurchase agreements amounting to £323 million (2010:
£122 million) for the Group and the Bank.
31 Trading liabilities

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Liabilities in respect of securities sold under repurchase agreements 19,069 17,906 19,069 17,906
Short positions in securities 1,736 860 1,736 860
Other – 20 – 20
Trading liabilities 20,805 18,786 20,805 18,786
At 31 December 2011, for both the Group and the Bank, £5,937 million (2010: £608 million) of trading liabilities had a contractual residual maturity of greater
than one year.
32 Debt securities in issue

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Medium-term notes issued 12,491 24,430 12,498 24,432
Covered bonds (note 17) 27,972 29,432 27,972 29,432
Certificates of deposit 350 3,061 350 3,061
Securitisation notes (note 17) 26,918 29,983 – –
Commercial paper 6,159 11,317 596 1,543
73,890 98,223 41,416 58,468
Amounts due to fellow Group undertakings 1,559 2,498 21,762 14,343
Total debt securities in issue 75,449 100,721 63,178 72,811
At 31 December 2011 £59,832 million (2010: £68,105 million) of debt securities in issue of the Group and £51,979 million (2010: £47,101 million) of the Bank
50
33 Other liabilities

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Settlement balances 923 655 923 655
Other creditors and accruals 3,616 4,358 3,694 3,357
Total other liabilities 4,539 5,013 4,617 4,012
34 Deferred tax
The movement in the net deferred tax balance is as follows:

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Asset at 1 January 4,825 5,153 4,510 4,410
Exchange and other adjustments 14 65 (6) (39)
Income statement (charge) credit (note 12):
Due to change in UK corporation tax rate (350) (132) (367) (152)
Other 136 138 83 446
(214) 6 (284) 294
Amount (charged) credited to equity:
Available-for-sale financial assets (note 39) (129) (228) (52) 15
Cash flow hedges (note 39) (447) (171) (446) (170)
Other – – – –
(576) (399) (498) (155)
Asset at 31 December 4,049 4,825 3,722 4,510
The statutory position reflects the deferred tax assets and liabilities as disclosed in the consolidated balance sheet and takes account of the inability to offset assets
and liabilities where there is no legally enforceable right of offset. The tax disclosure of deferred tax assets and liabilities ties to the amounts outlined in the table
below which splits the deferred tax assets and liabilities by type.
The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Statutory position
Deferred tax asset 4,050 4,826 3,722 4,519
Deferred tax liability (1) (1) – (9)
Net deferred tax asset 4,049 4,825 3,722 4,510
Tax disclosure
Deferred tax asset 4,653 5,294 4,107 4,606
Deferred tax liability (604) (469) (385) (96)
Net deferred tax asset 4,049 4,825 3,722 4,510
The deferred tax (charge) credit in the consolidated income statement comprises the following temporary differences:
2011 2010
£m £m
Accelerated capital allowances 117 (318)
Effective interest rate 28 14
Tax losses carried forward (279) 272
Provisions 7 (148)
Other temporary differences (87) 186
Deferred tax (charge) credit in the income statement (214) 6

51
34 Deferred tax (continued)
The Group The Bank

2011 2010 2011 2010
£m £m £m £m
Deferred tax assets:
Employee benefits 39 39 54 31
Capital allowances – – 207 241
Other provisions 245 238 180 195
Derivatives – 156 – 155
Available-for-sale asset revaluation 269 377 – –
Tax losses carried forward 3,563 3,896 3,562 3,895
Other temporary differences 537 588 104 89
Total deferred tax assets 4,653 5,294 4,107 4,606
Deferred tax liabilities:

Accelerated capital allowances (233) (363) – –
Available-for-sale asset revaluation – – (6) (5)
Derivatives (277) – (286) –
Effective interest rate (44) (72) (46) (61)
Other temporary differences (50) (34) (47) (30)
Total deferred tax liabilities (604) (469) (385) (96)
On 23 March 2011, the Government announced that the corporation tax rate applicable from 1 April 2011 would be 26 per cent. This change passed into legislation
on 29 March 2011. In addition, the Finance Act 2011, which passed into law on 19 July 2011, included legislation to reduce the main rate of corporation tax from
26 per cent to 25 per cent with effect from 1 April 2012. The change in the main rate of corporation tax from 27 per cent to 25 per cent has resulted in a reduction
in the Group’s net deferred tax asset at 31 December 2011 of £343 million, comprising the £350 million charge included in the income statement and an £7 million
credit included in equity.
The proposed further reductions in the rate of corporation tax by 1 per cent per annum to 23 per cent by 1 April 2014 are expected to be enacted separately each
year. The effect of these further changes upon the Group’s deferred tax balances and leasing business cannot be reliably quantified at this stage.
Deferred tax assets

Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable.
Group companies have recognised a deferred tax asset of £3,563 million and £3,562 million for the Bank (2010: £3,896 million for the Group and £3,895 million
for the Bank) in relation to trading tax losses carried forward. After reviews of medium-term profit forecasts, the Group considers that there will be sufficient profits in
the future against which these losses will be offset.
Deferred tax assets of £42 million for the Group and £20 million for the Bank (2010: £330 million for the Group and nil for the Bank) have not been recognised in
respect of capital losses carried forward as there are no predicted future capital profits. Capital losses can be carried forward indefinitely.
Deferred tax assets of £488 million for the Group and £nil for the Bank (2010: £227 million for the Group and nil for the Bank) have not been recognised in respect
of trading losses carried forward, arising in certain overseas companies, as there are limited predicted future trading profits to offset them. Trading losses can be
carried forward indefinitely.
In addition, deferred tax assets have not been recognised in respect of unrelieved foreign tax carried forward as at 31 December 2011 of £40 million for the Group
and the Bank (2010: £40 million for the Group and the Bank), as there are no predicted future taxable profits against which the unrelieved foreign tax credits can
be utilised. These tax credits can be carried forward indefinitely.
52
35 Other provisions
Vacant
Customer Customer leasehold
Provisions for remediation goodwill property
commitments provisions payments and other Total
The Group £m £m £m £m £m
At 1 January 2011 14 197 500 75 786
Exchange and other adjustments 1 16 – 32 49
Provisions applied (4) (466) (497) (12) (979)
Charge for the year 5 1,155 – 47 1,207
At 31 December 2011 16 902 3 142 1,063
Customer Customer Vacant leasehold

Provisions for remediation goodwill property and
commitments provisions payments other Total
The Bank £m £m £m £m £m
At 1 January 2011 8 197 500 60 765
Exchange and other adjustments 1 16 – 34 51
Provisions applied – (452) (497) (4) (953)
Charge for the year 5 1,115 – 31 1,151
At 31 December 2011 14 876 3 121 1,014
Provisions for commitments

Provisions are held in cases where the Group is irrevocably committed to advance additional funds, but where there is doubt as to the customer’s ability to meet its
repayment obligations.
Customer remediation provisions

Payment protection insurance
There has been extensive scrutiny of the Payment Protection Insurance (PPI) market in recent years.
In October 2010, the UK Competition Commission confirmed its decision to prohibit the active sale of PPI by a distributor to a customer within seven days of a sale
of credit. This followed the completion of its formal investigation into the supply of PPI services (other than store card PPI) to non‑business customers in the UK in
January 2009 and a referral of the proposed prohibition to the Competition Appeal Tribunal. The Competition Commission consulted on the wording of a draft Order
to implement its findings from October 2010, and published the final Order on 24 March 2011 which became effective on 6 April 2011. Following an earlier decision
to stop selling single premium PPI products, the Group ceased to offer PPI products to its customers in July 2010.
On 29 September 2009 the FSA announced that several firms had agreed to carry out reviews of past sales of single premium loan protection insurance. Lloyds
Banking Group agreed in principle that it would undertake a review in relation to sales of single premium loan protection insurance made through its branch network
since 1 July 2007. That review will now form part of the ongoing PPI work referred to below.
On 1 July 2008, the Financial Ombudsman Service (FOS) referred concerns regarding the handling of PPI complaints to the Financial Services Authority (FSA) as
an issue of wider implication. On 29 September 2009 and 9 March 2010, the FSA issued consultation papers on PPI complaints handling. The FSA published its
Policy Statement on 10 August 2010, setting out evidential provisions and guidance on the fair assessment of a complaint and the calculation of redress, as well as
a requirement for firms to reassess historically rejected complaints which had to be implemented by 1 December 2010.
On 8 October 2010, the British Bankers’ Association (BBA), the principal trade association for the UK banking and financial services sector, filed an application for
permission to seek judicial review against the FSA and the FOS. The BBA sought an order quashing the FSA Policy Statement and an order quashing the decision of
the FOS to determine PPI sales in accordance with the guidance published on its website in November 2008.
The Judicial Review hearing was held in late January 2011 and on 20 April 2011 judgment was handed down by the High Court dismissing the BBA’s application.
On 9 May 2011, the BBA confirmed that the banks and the BBA did not intend to appeal the judgment.
After publication of the judgment, the Group entered into discussions with the FSA with a view to seeking clarity around the detailed implementation of the Policy
Statement. As a result, and given the initial analysis that the Group has conducted of compliance with applicable sales standards, which is continuing, the Group has
concluded that there are certain circumstances where customer contact and/or redress will be appropriate. Accordingly the Group has made a provision in its income
statement for the year ended 31 December 2011 of £1,155 million in respect of the anticipated costs of such contact and/or redress, including administration expenses.
During 2011, the Group made redress payments of £375 million to customers. The Group anticipates that all claims will be settled by 2015. However, there are still a
number of uncertainties as to the eventual costs from any such contact and/or redress given the inherent difficulties of assessing the impact of the detailed implementation
of the Policy Statement for all PPI complaints, uncertainties around the ultimate emergence period for complaints, the availability of supporting evidence and the
activities of claims management companies, all of which will significantly affect complaints volumes, uphold rates and redress costs.
Other
The Group establishes provisions for the estimated cost of making redress payments to customers in respect of past product sales, in those cases where the original
sales processes have been found to be deficient. During 2011 management has again reviewed the adequacy of the provisions held having regard to current
complaint volumes and the level of payments being made. At 31 December 2011 the remaining such provisions held relate to past sales of a number of products,
including mortgage endowment policies, sold through the branch networks.
53
35 Other provisions (continued)
Customer goodwill payments

Following discussions with the FSA regarding the application of an interest rate variation clause in certain Bank of Scotland plc variable rate mortgage contracts Bank
of Scotland plc applied for a Voluntary Variation of Permission (VVOP) in February 2011 and agreed to initiate a customer review and contact programme and to
make goodwill payments to affected customers. The Group made a provision of £500 million within its 2010 accounts in respect of this matter. Since that time
further information has become available which has resulted in Bank of Scotland plc applying for, and being granted, an amended VVOP by the FSA in November
2011. No additional charge is required at this time.
Vacant leasehold property and other

Vacant leasehold property provisions are made by reference to a prudent estimate of expected sub-let income, compared to the head rent, and the possibility of
disposing of the Group’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on a biannual basis and will
normally run off over the period of under-recovery of the leases concerned, currently averaging three years; where a property is disposed of earlier than anticipated,
any remaining balance in the provision relating to that property is released.
36 Subordinated liabilities
The movement in subordinated liabilities during the year was as follows:

The Group The Bank
£m £m
At 1 January 2011 15,236 15,110
Repurchases and redemptions during the year (94) (591)
Foreign exchange and other movements 13 53
At 31 December 2011 15,155 14,572
The Group The Bank

2011 2010 2011 2010
£m £m £m £m
Preference shares – – – –
Preferred securities 712 705 301 301
Undated subordinated liabilities 4,884 4,871 5,315 5,569
Dated subordinated liabilities 9,559 9,660 8,956 9,240
Total subordinated liabilities 15,155 15,236 14,572 15,110
The Group The Bank

2011 2010 2011 2010
Preference shares £m £m £m £m
6% Non-cumulative Redeemable preference shares – – – –
Since 2009, the Company has had in issue 400 6% non-cumulative preference shares of 25p each. The shares are redeemable at the option of the Company at
any time and carry the rights to a fixed rate non-cumulative preferential dividend of 6% per annum; no dividend shall be paid in the event that the directors determine
that prudential capital ratios would not be maintained if the dividend were paid. Upon winding up the shares rank equally with any other preference shares issued
by the Company. The holder of the 400 25p 6% preference shares has waived its right to payment for the period from 1st March 2010 to 1st March 2012.
The Group The Bank
2011 2010 2011 2010
Preferred securities Note £m £m £m £m
8.117% Non-cumulative Perpetual Preferred Securities (Class A) (£250 million) b,c 260 253 – –
7.754% Non-cumulative Perpetual Preferred Securities (Class B) (£150 million) 151 151 – –
7.286% Perpetual Regulatory Tier One Securities (Series A) (£150 million) 151 151 151 151
7.281% Perpetual Regulatory Tier One Securities (Series B) (£150 million) 150 150 150 150
Total preferred securities 712 705 301 301
54
36 Subordinated liabilities (continued)
The Group The Bank

2011 2010 2011 2010
Undated subordinated liabilities Note £m £m £m £m
8.625% Perpetual Subordinated Notes (£200 million) a 26 24 26 24
c500 million Instruments 420 432 420 432
Floating Rate Primary Capital Notes (US$250 million) a,b 118 118 118 118
7.375% Subordinated Undated Instruments (£150 million) a 78 76 78 76
4.25% Instruments (¥17 billion) 174 161 174 161
10.25% Subordinated Undated Instruments (£100 million) a 1 1 1 1
£300 million Instruments 300 300 300 300
Perpetual Preferred Notes (£250 million) – – 261 252
Perpetual Preferred Notes (£150 million) – – 151 150
Floating Rate Subordinated Notes (£150 million) 150 150 150 150
12% Perpetual Subordinated Bonds (£100 million) a 26 22 26 22
8.75% Perpetual Subordinated Bonds (£100 million) a 5 5 5 5
13.625% Perpetual Subordinated Bonds (£75 million) 17 16 17 16
9.375% Perpetual Subordinated Bonds (£50 million) a 18 16 18 16
Floating Rate Subordinated Note (£2,000 million) 2,001 2,000 2,001 2,000
Floating Rate Subordinated Notes (c320 million) – – – 276
Floating Rate Subordinated Notes (c22 million) – – 19 20
Total undated subordinated liabilities 4,884 4,871 5,315 5,569
No exercise of any redemption option or purchase by the relevant entity of any of the undated subordinated liabilities may be made without the consent of the
Financial Services Authority. On a winding up of the Bank or subsidiary, the claims of the holders of undated loan capital shall be subordinated in right of payment
to the claims of all depositors and creditors of the Bank or subsidiary other than creditors whose claims are expressed to rank pari passu with or junior to the claims
of the holders of the undated loan capital. The undated loan capital is junior in point of subordination to the dated loan capital referred to above.
The Group The Bank
2011 2010 2011 2010
Dated subordinated liabilities £m £m £m £m
6.50% Notes 2011 (US$150 million) – 99 – 99
6.25% Instruments 2012 (c12.8 million) 8 10 8 10
6.125% Notes 2013 (c325 million) 287 296 287 296
6.375% Instruments 2019 (£250 million) 328 301 328 301
5.50% Subordinated Fixed Rate Notes 2012 (c750 million) 658 699 658 699
4.25% Subordinated Guaranteed Notes 2013 (US$1,000 million) 650 688 – –
Floating Rate Subordinated Notes 2014 (£330 million) 330 330 330 330
11% Subordinated Bonds 2014 (£250 million) 276 276 276 276
10.5% Subordinated Bonds 2018 (£150 million) 164 163 164 163
9.375% Subordinated Bonds 2021 (£500 million) 667 608 667 608
Floating Rate Subordinated Notes 2014 (£2,000 million) 2,001 2,000 2,001 2,000
Floating Rate Subordinated Notes 2014 (£1,000 million) 1,000 1,000 1,000 1,000
Floating Rate Subordinated Notes on rolling 5 year notice (c256 million) – – – 221
Floating Rate Subordinated Notes on rolling 5 year notice (c55 million) – – 47 47
Total dated subordinated liabilities 9,559 9,660 8,956 9,240
a) In November 2009, as part of the state aid restructuring plan, the Group agreed to suspend the payment of coupons on these instruments for the two year period
from 31 January 2010 to 31 January 2012.
b) These securities are callable at specific dates as per the terms of the securities at the option of the issuer and with approval from the FSA. In November 2009,
as part of the state aid restructuring plan, the Group agreed not to exercise any call options on these instruments for the two year period from 31 January 2010
to 31 January 2012.
c) The fixed rate on this security was reset from 8.117 per cent to 6.059 per cent with effect from 31 May 2010.
55
36 Subordinated liabilities (continued)
At 31 December 2011 £14,489 million (2010: £15,137 million) of subordinated liabilities of the Group and £13,906 million (2010: £15,011 million) of the Bank
No repayment, for whatever reason, of dated subordinated liabilities prior to their stated maturity and no purchase by the relevant entity of its subordinated debt may
be made without the consent of the Financial Services Authority. On a winding up of the Bank or subsidiary, the claims of the holders of dated loan capital shall be
subordinated in right of payment to the claims of all depositors and creditors of the Bank or subsidiary other than creditors whose claims are expressed to rank pari
passu with, or junior to, the claims of the holders of the dated loan capital.
37 Share capital
(1) Authorised share capital

Group and Bank
2011 2010 2011 2010
Number of shares Number of shares £m £m
Sterling
Ordinary shares of 25p
At 1 January and 31 December 24,085,301,755 24,085,301,755 6,021 6,021
9.25% non-cumulative irredeemable preference shares of £1 each – – – –
9.75% non-cumulative irredeemable preference shares of £1 each – – – –
8.117% non-cumulative perpetual preference shares class ‘A’ of £10 each 250,000 250,000 3 3
7.754% non-cumulative perpetual preference shares class ‘B’ of £10 each 150,000 150,000 2 2
6,026 6,026
(2) Issued share capital

Group and Bank
2011 2010 2011 2010
Number of shares Number of shares £m £m
Ordinary shares of 25p each
At 1 January 23,388,390,552 23,387,545,644 5,847 5,847
Ordinary share issues in 2010 – 794,908 – –
At 31 December 23,388,340,552 23,388,340,552 5,847 5,847
Issued and fully paid preference shares
Preference shares of 25p each
At 1 January and 31 December 400 400 – –
Total share capital at 31 December 23,388,340,952 23,388,340,952 5,847 5,847
37 Share capital
Ordinary share issuances during 2010

During 2010, a total of 794,908 ordinary shares were issued as consideration for the redemption of certain preference shares and other subordinated liabilities
issued by the Group (see also note 8).
38 Share premium account

Group and Bank
2011 2010
£m £m
At 1 January 27,479 26,684
Issue of ordinary shares (see note 37) – 795
At 31 December 27,479 27,479
56
39 Other reserves

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Other reserves comprise:
Merger and other reserves 1,600 1,600 1,600 1,600
Capital redemption reserve 482 482 482 482
Revaluation reserve in respect of available-for-sale financial assets (517) (899) (649) (796)
Cash flow hedging reserve 861 (415) 857 (412)
Foreign currency translation reserve (151) (153) 94 80
At 31 December 2,275 615 2,384 954
Movements in other reserves were as follows:

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Merger and other reserves
At 1 January and 31 December 1,600 1,600 1,600 1,600
The Group The Bank

2011 2010 2011 2010
£m £m £m £m
Capital redemption reserve
At 1 January 482 63 482 63
Redemption of preference shares – 419 – 419
At 31 December 482 482 482 482
The Group The Bank

2011 2010 2011 2010
£m £m £m £m
Revaluation reserve in respect of available-for-sale financial assets
At 1 January (899) (1,395) (796) (717)
Change in fair value of available-for-sale financial assets (90) 197 (123) (194)
Deferred tax 45 (95) 33 43
(45) 102 (90) (151)
Income statement transfers:
Disposals (note 8) (72) (52) 106 46
Deferred tax (28) 7 (28) (13)
(100) (45) 78 33
Impairment 749 641 292 116
Deferred tax (166) (157) (77) (32)
583 484 215 84
Other transfers to the income statement (76) (62) (76) (62)
Deferred tax 20 17 20 17
(56) (45) (56) (45)
At 31 December (517) (899) (649) (796)
The Group The Bank

2011 2010 2011 2010
£m £m £m £m
Cash flow hedging reserve
At 1 January (415) (839) (412) (832)
Change in fair value of hedging derivatives 1,350 (782) 1,342 (787)
Deferred tax (354) 201 (353) 202
996 (581) 989 (585)
Income statement transfer 373 1,377 373 1,377
Deferred tax (93) (372) (93) (372)
280 1,005 280 1,005
At 31 December 861 (415) 857 (412)
57
39 Other reserves (continued)
The Group The Bank

2011 2010 2011 2010
£m £m £m £m
Foreign currency translation reserve
At 1 January (153) 54 80 76
Currency translation differences arising in the year 28 (207) 14 4
Foreign currency losses on net investment hedges (tax: nil) (26) – – –
At 31 December (151) (153) 94 80
40 Retained profits

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
At 1 January (14,099) (9,867) (16,403) (12,746)
Loss for the year1 (3,105) (3,813) (2,431) (4,785)
Capital redemption – (419) – (419)
Adjustment arising on merger by absorption of Bank of Scotland
(Ireland) Limited (note 24) – – – 1,547
At 31 December (17,204) (14,099) (18,834) (16,403)
No income statement has been shown for the Bank, as permitted by Section 408 of the Companies Act 2006.
1
41 Dividends
No dividends were paid on the Bank’s ordinary shares in 2011 or 2010.
In November 2009, as part of the restructuring plan that was a requirement for European Commission approval of state aid received by the Lloyds Banking Group,
Lloyds Banking Group plc agreed to suspend the payment of coupons and dividends on certain preference shares and preferred securities for the two year period
from 31 January 2010 to 31 January 2012. Lloyds Banking Group plc has also agreed to temporarily suspend and/or waive dividend payments on certain preference
shares which have been issued intra-group. Consequently, in accordance with the terms of some of these instruments, the Bank was prevented from making dividend
payments on its ordinary shares during this period.
42 Share-based payments
Share-based payment scheme details

During the year ended 31 December 2011 Lloyds Banking Group plc operated a number of share-based payment schemes for which employees of the Group were
eligible and all of which are equity settled. Details of all schemes operated by Lloyds Banking Group plc are set out below; these are managed and operated on a
Lloyds Baking Group-wide basis.
The amount charged to the Group’s income statement in respect of Lloyds Banking Group share-based payment schemes, and which is included within staff costs
(note 9), was £147 million (2010: £220 million).
Deferred bonus plans

Bonuses in respect of the performance in 2011 of employees within certain of the Group’s bonus plans have been recognised in these financial statements in full.
Lloyds Banking Group executive share option schemes

The executive share option schemes were long-term incentive schemes available to certain senior executives of the Group, with grants usually made annually. Options
were granted within limits set by the rules of the schemes relating to the number of shares under option and the price payable on the exercise of options. The last
grant of executive options was made in August 2005. These options were granted without a performance multiplier and the maximum limit for the grant of options
in normal circumstances was three times annual salary. Between April 2001 and August 2004, the aggregate value of the award based upon the market price at
the date of grant could not exceed four times the executive’s annual remuneration and, normally, the limit for the grant of options to an executive in any one year
would be equal to 1.5 times annual salary with a maximum performance multiplier of 3.5. Prior to 18 April 2001, the normal limit was equal to one year’s
remuneration and no performance multiplier was applied.
Performance conditions for executive options

For options granted up to March 2001
The performance condition was that growth in earnings per share must be equal to the aggregate percentage change in the Retail Prices Index plus three percentage
points for each complete year of the relevant period together with a further condition that Lloyds Banking Group plc’s ranking based on total shareholder return
(calculated by reference to both dividends and growth in share price) over the relevant period should be in the top fifty companies of the FTSE 100.
The relevant period for the performance conditions began at the end of the financial year preceding the date of grant and continued until the end of the third
subsequent year following commencement or, if not met, the end of such later year in which the conditions were met. Once the conditions were satisfied the options
remained exercisable without further conditions. If they were not satisfied by the tenth anniversary of the grant the options would lapse.
58
42 Share-based payments (continued)
For options granted from August 2001 to August 2004

The performance condition was linked to the performance of Lloyds Banking Group plc’s total shareholder return (calculated by reference to both dividends and
growth in share price) against a comparator group of 17 companies including Lloyds Banking Group plc.
The performance condition was measured over a three year period which commenced at the end of the financial year preceding the grant of the option and continued
until the end of the third subsequent year. If the performance condition was not then met, it was measured at the end of the fourth financial year. If the condition
was not then met, the options would lapse.
To meet the performance conditions, the Group’s ranking against the comparator group was required to be at least ninth. The full grant of options only became
exercisable if the Group was ranked first. A performance multiplier (of between nil and 100 per cent) was applied below this level to calculate the number of shares
in respect of which options granted to Executive Directors would become exercisable, and were calculated on a sliding scale. If Lloyds Banking Group plc was ranked
below median the options would not be exercisable.
Options granted to senior executives other than Executive Directors were not so highly leveraged and, as a result, different performance multipliers were applied to
their options. For the majority of executives, options were granted with the performance condition but with no performance multiplier.
Options granted in 2004 became exercisable as the performance condition was met on the re-test. The performance condition vested at 14 per cent for Executive
Directors, 24 per cent for Managing Directors, and 100 per cent for all other executives.
For options granted in 2005

The same conditions applied as for grants made up to August 2004, except that:
––the performance condition was linked to the performance of Lloyds Banking Group plc’s total shareholder return (calculated by reference to both dividends and
growth in share price) against a comparator group of 15 companies including Lloyds Banking Group plc;
––if the performance condition was not met at the end of the third subsequent year, the options would lapse; and
––the full grant of options became exercisable only if the Group was ranked in the top four places of the comparator group. A sliding scale applied between fourth
and eighth positions. If Lloyds Banking Group was ranked below the median (ninth or below) the options would lapse.
Options granted in 2005 became exercisable as the performance condition was met when tested. The performance condition vested at 82.5 per cent for all
options granted.
Movements in the number of share options outstanding under the executive share option schemes during 2010 and 2011 are set out below:
2011 2010
Weighted Weighted
average average
Number of exercise price Number of exercise price
options (pence) options (pence)
Outstanding at 1 January 13,363,301 233.09 8,784,978 476.56
Rebasement adjustment – – 7,523,547 (26.43)
Exercised – – – –
Forfeited (2,140,790) 225.91 (2,945,224) 296.36
Lapsed (1,047,642) 324.92 – –
Outstanding at 31 December 10,174,869 225.15 13,363,301 233.09
Exercisable at 31 December 10,174,869 225.15 13,363,301 233.09
No options were exercised during 2011 or 2010. The weighted average remaining contractual life of options outstanding at the end of the year was 2.9 years
(2010: 3.6 years).
Save-As-You-Earn schemes
Eligible employees may enter into contracts through the Save-As-You-Earn schemes to save up to £250 per month and, at the expiry of a fixed term of three, five or
seven years, have the option to use these savings within six months of the expiry of the fixed term to acquire shares in the Group at a discounted price of no less
than 80 per cent of the market price at the start of the invitation.
Movements in the number of share options outstanding under the SAYE schemes are set out below:
2011 2010
Weighted Weighted
average average
Granted – – 655,712,663 46.78
Exercised (2,497,658) 47.34 (195,339) 49.30
Forfeited (18,408,624) 50.52 (13,922,185) 57.34
Cancelled (181,350,614) 47.78 (107,144,275) 66.53
Expired (12,768,106) 69.08 (18,923,463) 179.35
Exercisable at 31 December 25,490,233 77.82 663,942 172.93
59
The weighted average share price at the time that the options were exercised during 2011 was £0.54 (2010: £0.69). The weighted average remaining contractual
life of options outstanding at the end of the year was 1.7 years (2010: 2.7 years).
No SAYE options were granted in 2011. The weighted average fair value of SAYE options granted during 2011 was £nil (2010: £0.33). The values for the SAYE
options have been determined using a standard Black-Scholes model.
For the HBOS sharesave plan, no options were exercised during 2011 or 2010. The options outstanding at 31 December 2011 had an exercise price of £1.8066
(2010: £1.8066) and a weighted average remaining contractual life of 2.0 years (2010: 2.9 years).
Other share option plans
Lloyds Banking Group Executive Share Plan 2003
The plan was adopted in December 2003 and under the plan share options may be granted to senior employees. Options under this plan have been granted
specifically to facilitate recruitment and as such were not subject to any performance conditions. The plan’s usage has now been extended to not only compensate
new recruits for any lost share awards but also to make grants to key individuals for retention purposes with, in some instances, the grant being made subject to
individual performance conditions.
2011 2010
Weighted Weighted
average average
Outstanding at 1 January 47,694,757 Nil 26,099,185 Nil
Granted 16,395,016 Nil 13,429,561 Nil
Rebasement adjustment – – 12,501,246 Nil
Exercised (7,591,526) Nil (2,661,703) Nil
Forfeited (3,498,178) Nil (1,673,532) Nil
Outstanding at 31 December 53,000,069 Nil 47,694,757 Nil
Exercisable at 31 December 2,310,418 Nil – Nil
The weighted average fair value of options granted in the year was £0.46 (2010: £0.63). The weighted average share price at the time that the options were
exercised during 2011 was £0.51 (2010: £0.63). The weighted average remaining contractual life of options outstanding at the end of the year was 2.1 years
(2010: 2.4 years).
Lloyds Banking Group Share Buy Out Awards

As part of arrangements to facilitate the recruitment of certain Executives, options have been granted by individual deed and, where appropriate, in accordance with
the Listing Rules of the UK Listing Authority.
The awards were granted in recognition that the Executives’ outstanding awards over shares in their previous employing company lapsed on accepting employment
with the Group.
Movements in the number of options outstanding are set out below:
2011
Weighted
average exercise
Number of price
options (pence)
Outstanding at 1 January – –
Granted 21,728,172 Nil
Exercised (406,935) Nil
Outstanding at 31 December 21,321,237 Nil
Exercisable at 31 December 2,398,593 Nil
The weighted average fair value of options granted in the year was £0.38. The weighted average share price at the time that the options were exercised during 2011
was £0.54. The weighted average remaining contractual life of options outstanding at the end of the year was 9.6 years.
HBOS share option plans

The table below details the outstanding options for the HBOS Share Option Plan and the St James’s Place Share Option Plan. The final award under the HBOS Share
Option Plan was made in 2004. Under this plan, options over shares, at market value with a face value equal to 20 per cent of salary, were granted to employees
with the exception of certain senior executives. A separate option plan exists for some partners of St James’s Place, which granted options in respect of Lloyds
Banking Group plc shares. The final award under the St James’s Place Share Option Plan was made in 2009. Movements in the number of share options outstanding
under these schemes are set out below:
2011 2010
Weighted Weighted
average average
Forfeited (213,498) 253.88 (2,506,244) 611.90
Lapsed (2,423,444) 624.75 – –
Exercisable at 31 December 14,227,020 582.82 15,320,780 593.79
60
No options were exercised during 2011 or 2010. The options outstanding under the HBOS Share Option Plan and St James’s Place Share Option Plan at
31 December 2011 had exercise prices in the range of £0.5183 to £8.7189 (2010: £0.5183 to £8.7189) and a weighted average remaining contractual life of
2.0 years (2010: 3.0 years).
Other share plans

Lloyds Banking Group Long-Term Incentive Plan
The Long-Term Incentive Plan (LTIP) introduced in 2006 is aimed at delivering shareholder value by linking the receipt of shares to an improvement in the
performance of the Group over a three year period. Awards are made within limits set by the rules of the plan, with the limits determining the maximum number of
shares that can be awarded equating to three times annual salary. In exceptional circumstances this may increase to four times annual salary.
The performance conditions for awards made in March, April and August 2008 are as follows:
(i) For 50 per cent of the award (the EPS Award) – the percentage increase in earnings per share of the Group (on a compound annualised basis) over the
relevant period needed to be at least an average of 6 percentage points per annum greater than the percentage increase (if any) in the Retail Prices Index over
the same period. If it was less than 3 per cent per annum the EPS Award would lapse. If the increase was more than 3 per cent but less than 6 per cent per
annum then the proportion of shares released would be on a straight line basis between 17.5 per cent and 100 per cent. The relevant period commenced
on 1 January 2008 and ended on 31 December 2010.
(ii) For the other 50 per cent of the award (the TSR Award) – it was necessary for the Group’s total shareholder return (calculated by reference to both dividends
and growth in share price) to exceed the median of a comparator group (13 companies) over the relevant period by an average of 7.5 per cent per annum
for the TSR Award to vest in full. 17.5 per cent of the TSR Award would vest where the Group’s total shareholder return was equal to median and vesting
would occur on a straight line basis in between these points. Where the Group’s total shareholder return was below the median of the comparator group, the
TSR Award would lapse. The relevant period commenced on 6 March 2008 and ended on 5 March 2011.
In 2008, awards were made of 375 per cent of base salary to the Group Chief Executive and two of the Executive Directors for retention purposes, and in light of
data reviewed by the Remuneration Committee which showed total remuneration to be behind median both for the FTSE 20, and the other major UK banks.
As a consequence of the acquisition of HBOS and the general market turmoil, in March 2009 the Remuneration Committee decided that the performance test for
the 2008 awards should be based on the performance of the Group up to 17 September 2008, the date prior to the announcement of the HBOS acquisition. The
performance test was on a fair value basis, on the estimated probability, as at that date, of achieving the performance conditions. As a consequence, for all
participants, other than those who were Executive Directors at the time the award was granted and a small number of other senior executives, the share awards
vested at 29 per cent in March 2011.
The performance conditions for awards made in April, May and September 2009 are as follows:
(i) arnings per share (EPS): relevant to 50 per cent of the award. Performance will be measured based on EPS growth over a three-year period from the
E
baseline EPS of 2008.
If the growth in EPS reaches 26 per cent, 25 per cent of this element of the award, being the threshold, will vest. If growth in EPS reaches 36 per cent,
100 per cent of this element will vest.
(ii) Economic Profit (EP): relevant to 50 per cent of the award. Performance will be measured based on the extent to which cumulative EP targets are achieved
over the three‑year period.
If the absolute improvement in adjusted EP reaches 100 per cent, 25 per cent of this element of the award, being the threshold, will vest. If the absolute
improvement in adjusted EP reaches 202 per cent, 100 per cent of this element will vest.
The EPS and EP performance measures applying to this 2009 LTIP award were set on the basis that the Group would enter into the Government Asset Protection
Scheme. As the Group is not participating in the Government Asset Protection Scheme, in June 2010 the Remuneration Committee approved restated performance
measures on a basis consistent with the EPS and EP measures used for the 2010 LTIP awards.
An additional discretionary award was made in April, May and September 2009. The performance conditions for those awards are as follows:
Synergy Savings: The release of 50 per cent of the shares will be dependent on the achievement of target run‑rate synergy savings in 2009 and 2010 as
(i)
well as the achievement of sustainable synergy savings of at least £1.5 billion by the end of 2011. The award will be broken down into three equally weighted
annual tranches. Performance will be assessed at the end of each year against annual performance targets based on a trajectory to meet the 2011 target.
The extent to which targets have been achieved will determine the proportion of shares to be banked each year. Any release of shares will be subject to the
Remuneration Committee judging the overall success of the delivery of the integration programme.
Integration Balanced Scorecard: The release of the remaining 50 per cent of the shares will be dependent on the outcome of a Balanced Scorecard of non-
(ii)
financial measures of the success of the integration in each of 2009, 2010 and 2011. The Balanced Scorecard element will be broken down into three
equally weighted tranches. The tranches will be crystallised and banked for each year of the performance cycle subject to separate annual performance
targets across the four measurement categories of Building the Business, Customer, Risk and People and Organisation Development.
The performance conditions for awards made in March and August 2010 are as follows:
EPS: relevant to 50 per cent of the award. Performance will be measured based on EPS growth over a three-year period from the baseline EPS of 2009.
(i)
If the absolute improvement in adjusted EPS reaches 158 per cent, 25 per cent of this element of the award, being the threshold, will vest. If absolute
improvement in adjusted EPS reaches 180 per cent, 100 per cent of this element will vest.
Vesting between threshold and maximum will be on a straight line basis.
(ii) EP: relevant to 50 per cent of the award. Performance will be measured based on the compound annual growth rate of adjusted EP over the three financial
years starting on 1 January 2010 relative to an adjusted 2009 EP base.
61
If the compounded annual growth rate of adjusted EP reaches 57 per cent per annum, 25 per cent of this element of the award, being the threshold, will
vest. If the compounded annual growth rate of adjusted EP reaches 77 per cent per annum, 100 per cent of this element will vest.
For awards made to Executive Directors, a third performance condition was set, relating to Absolute Share Price, relevant to 28 per cent of the award. Performance
will be measured based on the Absolute Share Price on 26 March 2013, being the third anniversary of the award date. If the share price at the end of the
performance period is 75 pence or less, none of this element of the award will vest. If the share price is 114 pence or higher, 100 per cent of this element will vest.
Vesting between threshold and maximum will be on a straight line basis, provided that shares comprised in the Absolute Share Price element may only be released
if both the EPS and EP performance measures have been satisfied at the threshold level or above. The EPS and EP performance conditions will each relate to
36 per cent of the total award.
The performance conditions for awards made in March and September 2011 are as follows:
(i) EPS: relevant to 50 per cent of the award. The performance target is based on 2013 adjusted EPS outcome.
If the adjusted EPS reaches 6.4p, 25 per cent of this element of the award, being the threshold, will vest.
If adjusted EPS reaches 7.4p, 100 per cent of this element will vest.
(ii) EP: relevant to 50 per cent of the award. The performance target is based on 2013 adjusted EP outcome.
If the adjusted EP reaches £567 million, 25 per cent of this element of the award, being the threshold, will vest. If the adjusted EP reaches £1,234 million,
100 per cent of this element will vest.
For awards made to Executive Directors, a third performance condition was set, relating to Absolute Total Shareholder Return, relevant to one third of the award.
Performance will be measured based on the annualised Absolute Total Shareholder Return over the three year performance period. If the annualised Absolute Total
Shareholder Return at the end of the performance period is less than 8 per cent, none of this element of the award will vest. If the Absolute Total Shareholder Return
is 8 per cent, 25 per cent of this element of the award, being the threshold, will vest. If the Absolute Total Shareholder Return is 14 per cent or higher, 100 per cent
of this element will vest. Vesting between threshold and maximum will be on a straight line basis. The EPS and EP performance conditions will each relate to
33.3 per cent of the total award.
2011 2010
Number of Number of
shares shares
Outstanding at 1 January 447,142,491 223,233,052
Granted 147,280,077 148,810,591
Rebasement adjustment – 106,990,259
Vested (3,918,013) (1,985,339)
Forfeited (46,766,369) (29,906,072)
Outstanding at 31 December 543,738,186 447,142,491
The fair value of the share awards granted in 2011 was £0.54 (2010: £0.61).
The ranges of exercise prices, weighted average exercise prices, weighted average remaining contractual life and number of options outstanding for the option
schemes were as follows:
Executive schemes SAYE schemes Other share option plans
Weighted Weighted Weighted
average Weighted average Weighted average Weighted
exercise average exercise average exercise average
price remaining life Number of price remaining life Number of price remaining life Number of
(pence) (years) options (pence) (years) options (pence) (years) options
31 December 2011
Exercise price range
£0 to £1 – – – 47.94 1.7 446,965,447 4.94 4.1 82,152,838
£1 to £2 199.91 2.6 233,714 179.16 2.0 5,563,072 – – –
£2 to £3 225.74 2.9 9,941,155 214.16 0.9 490,513 – – –
£3 to £4 – – – – – – – – –
£5 to £6 – – – – – – 582.82 1.8 14,227,020
62
Executive schemes SAYE schemes Other share option plans

Weighted Weighted Weighted
average Weighted average Weighted average Weighted
exercise average exercise average exercise average
price remaining life Number of price remaining life Number of price remaining life Number of
(pence) (years) options (pence) (years) options (pence) (years) options
31 December 2010
Exercise price range
£0 to £1 – – – 47.74 2.7 658,912,847 7.41 2.5 55,656,496
£1 to £2 199.91 3.6 262,725 178.74 2.8 7,984,764 – – –
£2 to £3 225.83 3.9 12,052,934 210.74 1.4 1,146,423 – – –
£3 to £4 324.92 0.2 1,047,642 – – – – – –
– – – – – – 567.65
£5 to £6 2.9 15,462,949
The fair value calculations at 31 December 2011 for grants made in the year, using Black-Scholes models and Monte Carlo simulation, are based on the following
assumptions:
Executive
Share Plan Share Buy
2003 LTIP Out Awards
Risk-free interest rate 0.73% 1.77% 0.86%

Expected life 1.4 years 3.0 years 1.3 years
Expected volatility 54% 86% 51%
Expected dividend yield 1.7% 2.9% 1.6%
Weighted average share price 0.48 0.62 0.41
Weighted average exercise price Nil Nil Nil
Expected forfeitures 4% 4% 4%
Expected volatility is a measure of the amount by which the Group’s shares are expected to fluctuate during the life of an option. The expected volatility is estimated
based on the historical volatility of the closing daily share price over the most recent period that is commensurate with the expected life of the option. The historical
volatility is compared to the implied volatility generated from market traded options in the Group’s shares to assess the reasonableness of the historical volatility and
adjustments made where appropriate.
Share incentive plan

Free shares
An award of shares may be made annually to employees based on a percentage of each employee’s salary in the preceding year up to a maximum of £3,000. The
percentage is normally announced concurrently with the Group’s annual results and the price of the shares awarded is announced at the time of award. The shares
awarded are held in trust for a mandatory period of three years on the employee’s behalf, during which period the employee is entitled to any dividends paid on such
shares. The award is subject to a non‑market based condition: if an employee leaves the Group within this three year period for other than a ‘good’ reason, all of the
shares awarded will be forfeited.
The last award of free shares was made in 2008.
Matching shares
The Group undertakes to match shares purchased by employees up to the value of £30 per month; these matching shares are held in trust for a mandatory period
of three years on the employee’s behalf, during which period the employee is entitled to any dividends paid on such shares. The award is subject to a non-market
based condition: if an employee leaves within this three year period for other than a ‘good’ reason, 100 per cent of the matching shares are forfeited. Similarly if the
employees sell their purchased shares within three years, their matching shares are forfeited.
The number of shares awarded relating to matching shares in 2011 was 30,999,387 (2010: 17,411,651), with an average fair value of £0.42 (2010: £0.63),
based on market prices at the date of award.
63
43 Related party transactions
Key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an entity. At 31 December
2011 and 2010, the Group’s key management personnel are the members of the Lloyds Banking Group plc Group Executive Committee together with its
Non-Executive Directors.
The table below details, on an aggregated basis, key management personnel compensation which has been allocated to the Bank on an estimated basis.
2011 2010
£m £m
Compensation
Salaries and other short-term benefits 5 3

Share-based payments 4 3
9 6
The aggregate of the emoluments of the directors for qualifying services to the Bank, on an estimated basis, in 2011 was £3.4 million (2010: £4.2 million). The
total for the highest paid director (António Horta-Osório) was £1,646,000 (2010: (J E Daniels) £1,029,000).
2011 2010
million million
Share option plans over Lloyds Banking Group plc shares
At 1 January 6 2
Granted, including certain adjustments1 (includes entitlements of appointed directors) 20 4
Exercised/lapsed (includes entitlements of former directors) (4) –
At 31 December 22 6
1
2010 includes adjustments, using a standard HMRC formula, to negate the dilutionary impact of the Lloyds Banking Group’s 2009 capital raising activities.
2011 2010
million million
Share plans settled in Lloyds Banking Group plc shares
At 1 January 56 19
Granted, including certain adjustments1 (includes entitlements of appointed directors) 35 39
Exercised/lapsed (includes 31 million entitlements of former directors) (33) (2)
At 31 December 58 56
1
2010 includes adjustments, using a standard HMRC formula, to negate the dilutionary impact of the Lloyds Banking Group’s 2009 capital raising activities.
The tables below detail, on an aggregated basis, balances outstanding at the year end and related income and expense, together with information relating to other
transactions between Lloyds Banking Group and its key management personnel:
2011 2010
£m £m
Loans
At 1 January 3 2
Advanced (includes loans of appointed directors) 1 2
Repayments (includes loans of former directors) (1) (1)
At 31 December 3 3
The loans are on both a secured and unsecured basis and are expected to be settled in cash. The loans attracted interest rates of between 1.09 per cent and
27.5 per cent in 2011 (0.50 per cent and 17.90 per cent in 2010).
No provisions have been recognised in respect of loans given to key management personnel.

2011 2010
£m £m
Deposits
At 1 January 4 4
Placed (includes deposits of appointed directors) 17 12
Withdrawn (includes deposits of former directors) (15) (12)
At 31 December 6 4
Deposits placed by key management personnel attracted interest rates of up to 5 per cent in 2011 (2010: 4.25 per cent).
At 31 December 2011 and 2010, the Group did not provide any guarantees in respect of key management personnel.
At 31 December 2011, transactions, arrangements and agreements entered into by the Lloyds Banking Group’s banking subsidiaries with directors and
connected persons of the Group included amounts outstanding in respect of loans and credit card transactions of £3 million with four directors and three
connected persons (2010: £2 million with six directors and four connected persons).
64
43 Related party transactions (continued)
Balances and transactions with fellow Lloyds Banking Group undertakings

Balances and transactions between members of the Bank of Scotland group
In accordance with lAS 27, transactions and balances between the Bank and its subsidiary undertakings, and between those subsidiary undertakings, have all been
eliminated on consolidation and thus are not reported as related party transactions of the Group.
The Bank, as a result of its position as parent of a banking group, has a large number of transactions with various of its subsidiary undertakings; these are included on
the balance sheet of the Bank as follows:
2011 2010
£m £m
Assets, included within:
Derivative financial instruments 19 22
Loans and advances to banks – –
Loans and advances to customers 32,654 39,085
Debt securities 6,188 375
Other – 67
38,861 39,549
Liabilities, included within:
Deposits from banks 1 –
Customer deposits 29,712 36,547
Derivative financial instruments 81 109
Debt securities in issue 21,304 14,157
Subordinated liabilities 469 66
51,567 50,879
Due to the size and volume of transactions passing through these accounts, it is neither practical nor meaningful to disclose information on gross inflows and outflows.
During 2011 the Bank earned interest income on the above asset balances of £1,710 million (2010: £2,548 million) and incurred interest expense on the above
liability balances of £2,356 million (2010: £2,245 million).
Balances and transactions with Lloyds Banking Group plc and fellow subsidiaries of the Lloyds Banking Group
The Bank and its subsidiaries have balances due to and from the Bank’s ultimate parent company, Lloyds Banking Group plc and fellow subsidiaries of the Lloyds
Banking Group. These are included on the balance sheet as follows:
The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Assets, included within:
Derivative financial instruments 4,226 1,497 4,208 1,495
Loans and advances to banks 85,800 55,053 85,800 55,053
Loans and advances to customers 30,943 34,365 29,527 33,322
Trading and other financial assets at fair value through profit or loss 7,739 3,998 7,739 3,998
Other 1,171 3,196 310 429
129,879 98,109 127,584 94,297
The Group The Bank

2011 2010 2011 2010
£m £m £m £m
Liabilities, included within:
Deposits from banks 144,502 131,138 144,502 131,138
Customer deposits 35,267 40,949 30,020 35,065
Derivative financial instruments 8,562 4,196 8,546 4,196
Subordinated liabilities 11,151 11,266 11,195 12,216
Debt securities in issue 1,559 2,498 458 186
Trading liabilities 6,690 3,294 6,690 3,294
Other liabilities – 145 – 145
207,731 193,486 201,411 186,240
Due to the size and volume of transactions passing through these accounts, it is neither practical nor meaningful to disclose information on gross inflows and
outflows. During 2011 the Group earned £853 million and the Bank earned £1,196 million of interest income on the above asset balances (2010: £1,147 million
for the Group and £923 million for the Bank); the Group incurred £2,296 million and the Bank incurred £2,967 million of interest expense on the above liability
balances (2010: £2,565 million for the Group and £2,532 million for the Bank).
UK Government
In January 2009, the UK Government through HM Treasury became a related party of Lloyds Banking Group plc, the Bank's ultimate parent company, following its
subscription for ordinary shares issued under a placing and open offer. As at 31 December 2011, HM Treasury held a 40.2 per cent (31 December 2010:
65
43 Related party transactions (continued)
40.6 per cent) interest in Lloyds Banking Group plc’s ordinary share capital and consequently HM Treasury remained a related party of the Bank during the year ended
31 December 2011.
From 1 January 2011, in accordance with IAS 24 (Revised), UK Government-controlled entities became related parties of the Group. The Group regards the Bank
of England and entities controlled by the UK Government, including The Royal Bank of Scotland Group plc, Northern Rock (Asset Management) plc and Bradford &
Bingley plc, as related parties.
Since 1 January 2011, the Group has had the following significant transactions with the UK Government or UK Government-related entities:
Government and central bank facilities

During the year ended 31 December 2011, the Lloyds Banking Group participated in a number of schemes operated by the UK Government, and central banks and
made available to eligible banks and building societies.
Special liquidity scheme and credit guarantee scheme

The Bank of England’s UK Special Liquidity Scheme was launched in April 2008 to allow financial institutions to swap temporarily illiquid assets for treasury bills,
with fees charged based on the spread between 3-month LIBOR and the 3-month gilt repo rate. The scheme will operate for up to three years after the end of the
drawdown period (30 January 2009) at the Bank of England’s discretion. At 31 December 2011, the Lloyds Banking Group did not utilise the Special Liquidity
Scheme.
HM Treasury launched the Credit Guarantee Scheme in October 2008 as part of a range of measures announced by the UK Government intended to ease the
turbulence in the UK banking system. It charged a commercial fee for the guarantee of new short and medium term debt issuance. The fee payable to HM Treasury
on guaranteed issues was based on a per annum rate of 50 basis points plus the median five-year credit default swap spread. The drawdown window for the Credit
Guarantee Scheme closed for new issuance at the end of February 2010. At 31 December 2011, the Lloyds Banking Group had £23.5 billion of debt in issue under
the Credit Guarantee Scheme (31 December 2010: £45.4 billion). During the year, fees of £28 million paid to HM Treasury in respect of guaranteed funding were
included in the Lloyds Banking Group’s income statement.
Lending commitments
The formal lending commitments entered into in connection with the Lloyds Banking Group’s proposed participation in the Government Asset Protection Scheme
have now expired and in February 2011, Lloyds Banking Group plc (together with Barclays, Royal Bank of Scotland, HSBC and Santander) announced, as part of
the ‘Project Merlin’ agreement with HM Treasury, its capacity and willingness to increase business lending (including to small and medium‑sized enterprises)
during 2011.
Business Growth Fund

In May 2011 the Lloyds Banking Group agreed, together with The Royal Bank of Scotland plc (and three other non-related parties), to subscribe for shares in the
Business Growth Fund plc which is the company created to fulfil the role of the Business Growth Fund as set out in the British Bankers’ Association’s Business
Taskforce Report of October 2010. During 2011, the Lloyds Banking Group has incurred sunk costs of £4 million which have been written off.
As at 31 December 2011, the Lloyds Banking Group’s investment in the Business Growth Fund was £20 million.
Other government-related entities

Other than the transactions referred to above, there were no other significant transactions with the UK Government and UK Government‑controlled entities (including UK
Government-controlled banks) during the period that were not made in the ordinary course of business or that were unusual in their nature or conditions.
Other related party disclosures
Joint ventures and associates

The Group provides both administration and processing services to its principal joint venture Sainsbury’s Bank plc. The amounts receivable by the Group during the
year were £21 million (2010: £31 million), of which £10 million was outstanding at the year end (2010: £8 million). At 31 December 2011, Sainsbury’s Bank plc
also had balances with the Group and the Bank that were included in loans and advances to banks of £1,173 million (2010: £1,277 million), deposits by banks
of £780 million (2010: £1,358 million) and trading liabilities of £340 million (2010: nil).
The Group has a number of associates held by its venture capital business that it accounts for at fair value through profit or loss. At 31 December 2011, these
companies had total assets of approximately £7,330 million (2010: £4,713 million), total liabilities of approximately £6,528 million (2010: £4,199 million) and
for the year ended 31 December 2011 had turnover of approximately £3,950 million (2010: £744 million) and made a net loss of approximately £86 million (2010:
net profit of £164 million). In addition, the Group has provided £4,588 million (2010: £1,406 million) of financing to these companies on which it received
£27 million (2010: £19 million) of interest income in the year.
Banking transactions are entered into by the Bank with its subsidiaries in the normal course of business and are at normal commercial terms. These include loans,
deposits and foreign currency transactions.
At 31 December 2011 the Group had loans and advances to customers of £5,185 million (2010: £5,660 million), the Bank had loans and advances to customers
of £5,168 million (2010: £5,628 million), and the Group and Bank had outstanding balances within customer accounts of £88 million (2010: £151 million)
relating to joint ventures and associated undertakings.
Pension funds
During 2011, the Group sold at fair value certain non-government bonds, equities and alternative assets to Lloyds TSB Group Pension Scheme No 1 for £79 million
and to Lloyds TSB Group Pension Scheme No 2 for £43 million.
Taxation
Group relief was surrendered for no payment as per note 12.
66
44 Contingent liabilities and commitments
Legal proceedings
Interchange fees
The European Commission has adopted a formal decision finding that an infringement of European Commission competition laws has arisen from arrangements
whereby MasterCard set a uniform Multilateral Interchange Fee (MIF) in respect of cross-border transactions in relation to the use of a MasterCard or Maestro branded
payment card. The European Commission has required that the MIF be reduced to zero for relevant cross-border transactions within the European Economic Area.
This decision has been appealed to the General Court of the European Union (the General Court). Lloyds TSB Bank plc and Bank of Scotland plc (along with certain
other MasterCard issuers) have successfully applied to intervene in the appeal in support of MasterCard’s position that the arrangements for the charging of the MIF
are compatible with European Union competition laws. The UK Government has also intervened in the General Court appeal supporting the European Commission
position. An oral hearing took place on 8 July 2011 but judgment is not expected for six to twelve months. MasterCard has reached an understanding with the
European Commission on a new methodology for calculating intra-European Economic Area the MIF on an interim basis pending the outcome of the appeal.
Meanwhile, the European Commission is pursuing an investigation with a view to deciding whether arrangements adopted by Visa for the levying the MIF in respect
of cross-border payment transactions also infringe European Union competition laws. In this regard Visa reached an agreement with the European Commission to
reduce the level of interchange for cross-border debit card transactions to the interim levels agreed by MasterCard. The UK’s Office of Fair Trading has also
commenced similar investigations relating to the the MIF in respect of domestic transactions in relation to both the MasterCard and Visa payment schemes. The
ultimate impact of the investigations on the Group can only be known at the conclusion of these investigations and any relevant appeal proceedings.
Interbank offered rate setting investigations

Several government agencies in the UK, US and overseas, including the US Commodity Futures Trading Commission, the US SEC, the US Department of Justice and
the FSA as well as the European Commission, are conducting investigations into submissions made by panel members to the bodies that set various interbank offered
rates. The Group, and/or its subsidiaries, were (at the relevant time) and remain members of various panels that submit data to these bodies. The Group has received
requests from some government agencies for information and is co-operating with their investigations. In addition, the Group has been named in private lawsuits,
including purported class action suits in the US with regard to the setting of London interbank offered rates (LIBOR). It is currently not possible to predict the scope
and ultimate outcome of the various regulatory investigations or private lawsuits, including the timing and scale of the potential impact of any investigations and
private lawsuits on the Group.
Financial Services Compensation Scheme (FSCS)

The FSCS is the UK’s independent statutory compensation fund for customers of authorised financial services firms and pays compensation if a firm is unable to pay
claims against it. The FSCS is funded by levies on the industry (and recoveries and borrowings where appropriate). The levies raised comprise both management
expenses levies and, where necessary, compensation levies on authorised firms.
Following the default of a number of deposit takers in 2008, the FSCS borrowed funds from HM Treasury to meet the compensation costs for customers of those
firms. The borrowings with HM Treasury, which total circa £20 billion, are on an interest-only basis until 31 March 2012 and the FSCS and HM Treasury are
currently discussing the terms for refinancing these borrowings to take effect from 1 April 2012. Each deposit-taking institution contributes towards the management
expenses levies in proportion to their share of total protected deposits on 31 December of the year preceding the scheme year, which runs from 1 April to 31 March.
In determining an appropriate accrual in respect of the management expenses levy, certain assumptions have been made including the proportion of total protected
deposits held by the Group, the level and timing of repayments to be made by the FSCS to HM Treasury and the interest rate to be charged by HM Treasury. For the
year ended 31 December 2011, the Group has charged £81 million (2010: £28 million) to the income statement in respect of the costs of the FSCS.
Whilst it is expected that the substantial majority of the principal will be repaid from funds the FSCS receives from asset sales, surplus cash flow or other recoveries
in relation to the assets of the firms that defaulted, to the extent that there remains a shortfall, the FSCS will raise compensation levies on all deposit-taking
participants. The amount of any future compensation levies also depends on a number of factors including the level of protected deposits and the population of
deposit-taking participants and will be determined at a later date. As such, although the Group’s share of such compensation levies could be significant, the Group
has not recognised a provision in respect of them in these financial statements.
Shareholder complaints
Lloyds Banking Group plc and two former members of Lloyds Banking Group plc’s Board of Directors have been named as defendants in a purported securities class
action pending in the United States District Court for the Southern District of New York. The complaint, dated 23 November 2011, asserts claims under the Securities
Exchange Act of 1934 in connection with alleged material omissions from statements made in 2008 in connection with the acquisition of HBOS by Lloyds Banking
Group plc. No quantum is specified.
In addition, a UK-based shareholder action group has threatened multi-claimant claims on a similar basis against the Lloyds Banking Group plc and two former
directors in the UK. No claim has yet been issued.
Lloyds Banking Group plc considers that the claims are without merit and will defend them vigorously. The claims have not been quantified and it is not possible to
estimate the ultimate financial impact on Lloyds Banking Group plc or the Group at this early stage.
FSA investigation into the Bank

In 2009 the FSA commenced a supervisory review into HBOS. The supervisory review has now been superseded as the FSA has commenced enforcement
proceedings against the Bank in relation to its Corporate division pre 2009. The proceedings are ongoing and the Group is co-operating fully. It is too early to predict
the outcome or estimate reliably any potential financial effects of the enforcement proceedings but they are not currently expected to be material to the Group.
Regulatory matters
In the course of its business, the Group is engaged in discussions with the FSA in relation to a range of conduct of business matters, including complaints handling,
packaged bank accounts, saving accounts, product terms and conditions, interest only mortgages, sales processes and remuneration schemes. The Group is keen
to ensure that any regulatory concerns are understood and addressed. The ultimate impact on the Group of these discussions can only be known at the conclusion
of such discussions.
Other legal actions and regulatory matters

In addition, during the ordinary course of business the Group is subject to other threatened and actual legal proceedings (which may include class action lawsuits
brought on behalf of customers, shareholders or other third parties), regulatory investigations, regulatory challenges and enforcement actions, both in the UK and
overseas. All such material matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood
of the Group incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to
67
44 Contingent liabilities and commitments (continued)
management’s best estimate of the amount required to settle the obligation at the relevant balance sheet date. In some cases it will not be possible to form a view,
either because the facts are unclear or because further time is needed properly to assess the merits of the case and no provisions are held against such matters.
However the Group does not currently expect the final outcome of any such case to have a material adverse effect on its financial position.
Contingent liabilities and commitments arising from the banking business

Acceptances and endorsements arise where the Group agrees to guarantee payment on a negotiable instrument drawn up by a customer.
Other items serving as direct credit substitutes include standby letters of credit, or other irrevocable obligations, where the Group has an irrevocable obligation to pay
a third party beneficiary if the customer fails to repay an outstanding commitment; they also include acceptances drawn under letters of credit or similar facilities
where the acceptor does not have specific title to an identifiable underlying shipment of goods.
Performance bonds and other transaction-related contingencies (which include bid or tender bonds, advance payment guarantees, VAT Customs & Excise bonds and
standby letters of credit relating to a particular contract or non-financial transaction) are undertakings where the requirement to make payment under the guarantee
depends on the outcome of a future event.
The Group’s maximum exposure to loss is represented by the contractual nominal amount detailed in the table below. Consideration has not been taken of any
possible recoveries from customers for payments made in respect of such guarantees under recourse provisions or from collateral held.
The Group The Bank

2011 2010 2011 2010
£m £m £m £m
Contingent liabilities
Acceptances and endorsements 3 1 3 1
Other:
Other items serving as direct credit substitutes 110 103 110 103
Performance bonds and other transaction-related contingencies 674 575 616 511
784 678 726 614
Total contingent liabilities 787 679 729 615
The contingent liabilities of the Group, as detailed above, arise in the normal course of its banking business and it is not practicable to quantify their future financial
effect.
The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Commitments
Documentary credits and other short-term trade-related transactions 8 2 8 2
Undrawn formal standby facilities, credit lines and other commitments to lend:
Less than 1 year original maturity:
Mortgage offers made 6,311 6,875 6,311 6,875
Other commitments 22,851 32,130 21,130 37,253
29,162 39,005 27,441 44,128
1 year or over original maturity 16,442 12,617 12,226 11,668
Total commitments 45,612 51,624 39,675 55,798
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £15,087 million (2010: £22,476 million)
for the Group and £13,498 million (2010: £20,544 million) for the Bank were irrevocable.
Operating lease commitments

Where a Group company is the lessee the future minimum lease payments under non-cancellable premises operating leases are as follows:
The Group The Bank

2011 2010 2011 2010
£m £m £m £m
Later than 1 year and not later than 5 years 475 564 457 521
Later than 5 years 783 1,015 776 903
Total operating lease commitments 1,397 1,739 1,362 1,568
Operating lease payments represent rental payable by the Group for certain of its properties. Some of these operating lease arrangements have renewal options and
rent escalation clauses, although the effect of these is not material. No arrangements have been entered into for contingent rental payments.
Capital commitments
Excluding commitments of the Group in respect of investment property (note 22), capital expenditure contracted but not provided for at 31 December 2011
amounted to £nil for the Group and £nil for the Bank (2010: £89 million for the Group and £6 million for the Bank). Of the capital commitments of the Group, £nil
(2010: £44 million) related to assets to be leased to customers under operating leases. The Group’s management is confident that future net revenues and funding
will be sufficient to cover these commitments.
68
45 Financial instruments
(1) Measurement basis of financial assets and liabilities

The accounting policies in note 2 describe how different classes of financial instruments are measured, and how income and expenses, including fair value gains
and losses, are recognised. The following table analyses the carrying amounts of the financial assets and liabilities by category and by balance sheet heading.
At fair value
Derivatives through profit or loss
designated Designated Held at
as hedging Held for upon initial Available- Loans and amortised
instruments trading recognition for-sale receivables cost Total
The Group £m £m £m £m £m £m £m
At 31 December 2011
Financial assets
Cash and balances at central banks – – – – – 3,070 3,070
Items in the course of collection from banks – – – – – 431 431
Trading and other financial assets at fair value through profit or loss – 21,840 475 – – – 22,315
Derivative financial instruments 9,617 26,666 – – – – 36,283
Loans and advances to banks – – – – 89,490 – 89,490
Loans and advances to customers – – – – 376,355 – 376,355
Debt securities – – – – 11,886 – 11,886
– – – – 477,731 – 477,731
Available-for-sale financial assets – – – 8,288 – – 8,288
Total financial assets 9,617 48,506 475 8,288 477,731 3,501 548,118
Financial liabilities
Deposits from banks – – – – – 150,070 150,070
Customer deposits – – – – – 235,855 235,855
Items in course of transmission to banks – – – – – 332 332
Trading liabilities – 20,805 – – – – 20,805
Notes in circulation – – – – – 1,145 1,145
Debt securities in issue – – – – – 75,449 75,449
Financial guarantees – – 17 – – – 17
Subordinated liabilities – – – – – 15,155 15,155
Total financial liabilities 8,568 47,499 17 – – 478,006 534,090
69
45 Financial instruments (continued)
At fair value
Derivatives through profit or loss
At 31 December 2010
Financial assets
Debt securities – – – – 23,632 – 23,632
– – – – 490,506 – 490,506

At fair value through
Derivatives profit or loss
The Bank £m £m £m £m £m £m £m
At 31 December 2011
Financial assets
Loans and receivables: –
Debt securities – – – – 15,407 – 15,407
– – – – 490,861 – 490,861
70
At fair value through

Derivatives profit or loss
£m £m £m £m £m £m £m
At 31 December 2010
Financial assets
Debt securities – – – – 17,433 – 17,433
– – – – 494,085 – 494,085
(2) Reclassification of financial assets

No assets were reclassified in 2011 or 2010.
In accordance with the amendment to IAS 39 that became applicable during 2008, the Group reviewed the categorisation of its financial assets classified as held
for trading and available-for-sale. On the basis that there was no longer an active market for some of those assets, which are therefore more appropriately managed
as loans, the Group reclassified the following financial assets:
––In January 2009, the Group reclassified £1,825 million of debt securities classified as held for trading to debt securities classified as loans and receivables.
––In addition, the Group reclassified £649 million of securities classified as available-for-sale to debt securities classified as loans and receivables.
––With effect from 1 July 2008, the Group transferred £12,210 million of assets previously classified as held for trading into available-for-sale.
––With effect from 1 November 2008, the Group transferred £35,446 million of assets previously classified as available-for-sale financial assets into loans and
receivables.
At the time of these transfers, the Group had the intention and ability to hold them for the foreseeable future or until maturity. As at the date of reclassification, the
weighted average effective interest rate of the assets transferred was 0.7 per cent to 9.5 per cent with estimated recoverable cash flows of £56,743 million.
Carrying value and fair value of reclassified assets

The table below sets out the carrying value and fair value of reclassified financial assets.
31 December 2011 31 December 2010 31 December 2009 31 December 2008

Carrying Fair Carrying Fair Carrying Fair Carrying Fair
value value value value value value value value
£m £m £m £m £m £m £m £m
From held for trading to loans and receivables 269 254 949 965 1,428 1,120 – –
From held for trading to available-for-sale 1,980 1,890 6,116 6,431 10,478 10,176 13,542 13,542
From available-for-sale to loans and receivables 10,052 9,258 21,508 21,522 29,153 27,820 37,173 36,191
Total carrying value and fair value 12,301 11,402 28,573 28,918 41,059 39,116 50,715 49,733
During the year ended 31 December 2011, the carrying value of reclassified assets decreased by £16,272 million due to sales and maturities of £16,405 million,
foreign exchange and other movements of £223 million, less accretion of discount of £356 million.
No financial assets were reclassified in accordance with the amendment to IAS 39 in 2011 or 2010; the following disclosures relate to those assets which were
reclassified in 2008 and 2009.
71
a) Additional fair value gains (losses) that would have been recognised had the reclassifications not occurred
The table below shows the additional gains (losses) that would have been recognised since the date of reclassification in the Group’s income statement or through
the Group’s available-for-sale revaluation reserve if the reclassifications had not occurred.
2011 2010 2009 2008

Reclassified Reclassified Reclassified Reclassified Reclassified Reclassified Reclassified
in 2009 in 2008 Total in 2009 in 2008 Total in 2009 in 2008 Total in 2008 Total
£m £m £m £m £m £m £m £m £m £m £m
From held for trading to
loans and receivables 11 – 11 14 – 14 13 – 13 – –
available-for-sale – 26 26 – 136 136 – 904 904 981 981
From available-for-sale to
loans and receivables – 130 130 – (134) (134) 70 1,147 1,217 708 708
Total additional fair
value gains 11 156 167 14 2 16 83 2,051 2,134 1,689 1,689
b) Actual amounts recognised in respect of reclassified assets

After reclassification the reclassified financial assets contributed the following amounts to the Group income statement:
2011 2010 2009 2008

Reclassified Reclassified Reclassified Reclassified Reclassified Reclassified Reclassified
in 2009 in 2008 Total in 2009 in 2008 Total in 2009 in 2008 Total in 2008 Total
£m £m £m £m £m £m £m £m £m £m £m
loans and receivables:
Net interest income 16 – 16 23 – 23 45 – 45 – –
Impairment losses (13) – (13) – – – (110) – (110) – –
Gains on disposal 32 – 32 109 – 109 17 – 17 – –
Total amounts
recognised 35 – 35 132 – 132 (48) – (48) – –
available-for-sale:
Net interest income – 141 141 – 184 184 – 281 281 442 442
Impairment losses – (8) (8) – 1 1 – (305) (305) (215) (215)
(Losses) gains on
disposal – (26) (26) – 95 95 – 70 70 – –
Total amounts
recognised – 107 107 – 280 280 – 46 46 227 227
From available-for-sale to
loans and receivables:
Net interest income – 213 213 14 443 457 25 377 402 82 82
Impairment losses – (6) (6) – (33) (33) – (371) (371) (558) (558)
(Losses) gains on
disposal – (323) (323) (9) (128) (137) – (152) (152) 16 16
Total amounts
recognised – (116) (116) 5 282 287 25 (146) (121) (460) (460)
72
(3) Fair values of financial assets and liabilities

The following table summarises the carrying values of financial assets and liabilities presented on the Group’s and Bank’s balance sheets. The fair values presented
in the table are at a specific date and may be significantly different from the amounts which will actually be paid or received on the maturity or settlement date.
The Group The Bank

2011 2010 2011 2010
Carrying Carrying Carrying Carrying
value Fair value value Fair value value Fair value value Fair value
£m £m £m £m £m £m £m £m
Financial assets
Cash and balances at central banks 3,070 3,070 2,375 2,375 3,065 3,065 2,318 2,318
Items in the course of collection from banks 431 431 319 319 431 431 314 314
Trading and other financial assets at fair value through
profit or loss 22,315 22,315 24,696 24,696 22,004 22,004 24,397 24,397
Derivative financial instruments 36,283 36,283 29,451 29,451 35,820 35,820 27,362 27,362
Loans and advances to banks 89,490 89,452 61,349 61,368 89,270 89,232 61,024 61,043
Loans and advances to customers 376,335 363,375 405,525 391,564 386,184 373,183 415,628 402,519
Debt securities 11,886 10,089 23,632 23,790 15,407 14,113 17,433 16,466
Available-for-sale financial assets 8,288 8,288 14,422 14,422 6,896 6,896 13,507 13,507
Deposits from banks 150,070 150,168 143,056 143,650 149,608 149,706 141,839 142,334
Customer deposits 235,855 236,667 241,517 242,575 260,232 261,043 271,900 272,958
Items in course of transmission to banks 332 332 251 251 330 330 251 251
Trading liabilities 20,805 20,805 18,786 18,786 20,805 20,805 18,786 18,786
Derivative financial instruments 35,262 35,262 27,268 27,268 34,926 34,926 26,986 26,986
Notes in circulation 1,145 1,145 1,074 1,074 1,145 1,145 1,074 1,074
Debt securities in issue 75,449 73,159 100,721 98,176 63,178 61,358 72,811 70,749
Financial guarantees 17 17 12 12 17 17 12 12
Subordinated liabilities 15,155 13,462 15,236 15,587 14,572 13,028 15,110 15,462
Valuation methodology
Financial instruments include financial assets, financial liabilities and derivatives. The fair value of a financial instrument is the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
Wherever possible, fair values have been estimated using market prices for instruments held by the Group. Where market prices are not available, or are unreliable
because of poor liquidity, fair values have been determined using valuation techniques which, to the extent possible, use market observable inputs. Valuation
techniques used include discounted cash flow analysis and pricing models and, where appropriate, comparison to instruments with characteristics either identical
or similar to those of the instruments held by the Group. These estimation techniques are necessarily subjective in nature and involve several assumptions.
Because a variety of estimation techniques are employed and significant estimates made, comparisons of fair values between financial institutions may not be
meaningful. Readers of these financial statements are thus advised to use caution when using this data to evaluate the Group’s financial position.
Fair value information is not provided for items that do not meet the definition of a financial instrument. These items include intangible assets, premises, equipment
and shareholders’ equity. These items are material and accordingly the Group believes that the fair value information presented does not represent the underlying
value of the Group.
Valuation control framework

The key elements of the control framework for the valuation of financial instruments include model validation, product implementation review and independent price
verification. These functions are carried out by appropriately skilled risk and finance teams, independent of the business area responsible for the products.
Model validation covers both qualitative and quantitative elements relating to new models. In respect of new products, a product implementation review is conducted
pre- and post-trading. Pre-trade testing ensures that the new model is integrated into the Group’s systems and that the profit and loss and risk reporting are consistent
throughout the trade life cycle. Post-trade testing examines the explanatory power of the implemented model, actively monitoring model parameters and comparing
in-house pricing to external sources. Independent price verification procedures cover financial instruments carried at fair value. The frequency of the review is
matched to the availability of independent data, monthly being the minimum. Valuation differences in breach of established thresholds are escalated to senior
management. The results from independent pricing and valuation reserves are reviewed monthly by senior management
Formal committees, consisting of senior risk, finance and business management, meet at least quarterly to discuss and approve valuations in more judgemental
areas, in particular for unquoted equities, structured credit, over-the-counter options and the Credit Valuation Adjustment (CVA) reserve.
Fair value of financial instruments carried at amortised cost
Cash and balances at central banks and items in the course of collection from banks
The fair value approximates carrying value due to their short-term nature.
73
Loans and receivables

The Group provides loans and advances to commercial, corporate and personal customers at both fixed and variable rates. The carrying value of the variable rate
loans and those relating to lease financing is assumed to be their fair value. For fixed rate lending, several different techniques are used to estimate fair value, as
considered appropriate. These techniques also take account of expected credit losses and changes in interest rates and expected future cash flows in establishing fair
value. For commercial and personal customers, fair value is principally estimated by discounting anticipated cash flows (including interest at contractual rates) at
market rates for similar loans offered by the Group and other financial institutions. The fair value for corporate loans is estimated by discounting anticipated cash
flows at a rate which reflects the effects of interest rate changes, adjusted for changes in credit risk. Certain loans secured on residential properties are made at a
fixed rate for a limited period, typically two to five years, after which the loans revert to the relevant variable rate. The fair value of such loans is estimated by reference
to the market rates for similar loans of maturity equal to the remaining fixed interest rate period. The fair values of asset-backed securities and secondary loans, which
were previously within assets held for trading and were reclassified to loans and receivables, are determined predominantly from lead manager quotes and, where
these are not available, by alternative techniques including reference to credit spreads on similar assets with the same obligor, market-standard consensus pricing
services, broker quotes and other research data.
Deposits from banks and customer deposits

The fair value of deposits repayable on demand is considered to be equal to their carrying value. The fair value for all other deposits is estimated using discounted
cash flows applying either market rates, where applicable, or current rates for deposits of similar remaining maturities.
Items in course of transmission to banks

The fair value approximates carrying value due to their short-term nature.
Notes in circulation
The fair value of notes in circulation which are payable on demand is considered to be equal to their carrying value.
Debt securities in issue and subordinated liabilities

The fair value of short-term debt securities in issue is approximately equal to their carrying value. Fair value for other debt securities and for subordinated liabilities
is estimated using quoted market prices.
Valuation of financial instruments carried at fair value

The valuations of financial instruments have been classified into three levels according to the quality and reliability of information used to determine the fair values.
Level 1 portfolios
Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified as level 1
predominantly comprise equity shares, treasury bills and other government securities.
Level 2 portfolios
Level 2 valuations are those where quoted market prices are not available, for example where the instrument is traded in a market that is not considered to be active
or valuation techniques are used to determine fair value and where these techniques use inputs that are based significantly on observable market data. Examples of
such financial instruments include most over-the-counter derivatives, financial institution issued securities, certificates of deposit and certain asset-backed securities.
Level 3 portfolios
Level 3 portfolios are those where at least one input which could have a significant effect on the instrument’s valuation is not based on observable market data. Such
instruments would include the Group’s venture capital and unlisted equity investments which are valued using various valuation techniques that require significant
management judgement in determining appropriate assumptions, including earnings multiples and estimated future cash flows. Certain of the Group’s asset-backed
securities and derivatives, principally where there is no trading activity in such securities, are also classified as level 3.
74
The table below provides an analysis of the financial assets and liabilities of the Group that are carried at fair value in the Group’s consolidated balance sheet, grouped
into levels 1 to 3 based on the degree to which the fair value is observable.
Valuation hierarchy
The Group Level 1 Level 2 Level 3 Total
At 31 December 2011 £m £m £m £m
Trading and other financial assets at fair value through profit or loss
Loans and advances to customers – 17,435 – 17,435
Loans and advances to banks – 1,355 – 1,355
Debt securities:
Government securities 992 – – 992
Bank and building society certificates of deposit – 1,384 – 1,384
Other asset-backed securities – – 203 203
Corporate and other debt securities – 397 39 436
992 1,781 242 3,015
Equity shares 94 2 190 286
Treasury and other bills 224 – – 224
Total trading and other financial assets at fair value through profit or loss 1,310 20,573 432 22,315
Available-for-sale financial assets
Debt securities:
Bank and building society certificates of deposit – 32 – 32
Mortgage-backed securities – 789 – 789
Other asset-backed securities – 57 26 83
Corporate and other debt securities 23 5,394 12 5,429
98 6,272 38 6,408
Equity shares 51 42 1,787 1,880
Total available-for-sale financial assets 149 6,314 1,825 8,288
Derivative financial instruments – 35,932 351 36,283
Total financial assets carried at fair value 1,459 62,819 2,608 66,886
Trading liabilities
Liabilities in respect of securities sold under repurchase agreements – 19,069 – 19,069
Short positions in securities 1,736 – – 1,736
Total trading liabilities 1,736 19,069 – 20,805
Financial guarantees – – 17 17
Total financial liabilities carried at fair value 1,736 54,300 48 56,084
There were no significant transfers between level 1 and level 2 during the year.
Level 1 Level 2 Level 3 Total
Trading and other financial assets at fair value through profit or loss 1,215 22,897 584 24,696
Available-for-sale financial assets 337 12,019 2,066 14,422
Total financial assets carried at fair value 1,552 64,102 2,915 68,569
Trading liabilities 864 17,922 – 18,786
Total financial liabilities carried at fair value 864 45,156 46 46,066
75
The Bank
Level 1 Level 2 Level 3
At 31 December 2011 Valuation Valuation Valuation Total
Trading and other financial assets at fair value through profit or loss £'m £'m £'m £'m
Loans and advances to customers – 17,435 – 17,435
Loans and advances to banks – 1,355 – 1,355
Debt securities:
Bank and building society certificates of deposit – 1,384 – 1,384
Other asset-backed securities – – 203 203
Corporate and other debt securities – 301 34 335
992 1,685 237 2,914
Equity shares 24 – 52 76
Treasury and other bills 224 – – 224
Total trading and other financial assets at fair value through profit or loss 1,240 20,475 289 22,004
Debt securities:
Bank and building society certificates of deposit – 32 – 32
Other asset-backed securities – 275 26 301
Corporate and other debt securities 23 5,395 17 5,435
98 5,702 43 5,843
Equity shares 1,004 24 25 1,053
Total available-for-sale financial assets 1,102 5,726 68 6,896

Total financial assets carried at fair value 2,342 61,670 708 64,720
Trading liabilities
Liabilities in respect of securities sold under repurchase agreements – 19,089 – 19,089
Short positions in securities 1,736 – – 1,736
Total trading liabilities 1,736 19,089 – 20,825

Total financial liabilities carried at fair value 1,736 53,984 48 55,768
Level 1 Level 2 Level 3 Total

Trading and other financial assets at fair value through profit or loss 1,207 22,899 291 24,397
Available-for-sale financial assets 1,289 12,178 40 13,507
Total financial assets carried at fair value 2,496 62,174 596 65,266
Trading liabilities 860 17,926 – 18,786
Total financial liabilities carried at fair value 860 44,878 46 45,784
76
Valuation methodology
Asset-backed securities
Where there is no trading activity in asset-backed securities, valuation models, consensus pricing information from third party pricing services and broker or lead
manager quotes are used to determine an appropriate valuation. Asset-backed securities are then classified as either level 2 or level 3 depending on whether there
is more than one consistent independent source of data. If there is a single, uncorroborated market source for a significant valuation input or where there are
materially inconsistent levels then the security is reported as level 3. Asset classes classified as level 3 mainly comprise certain collateralised loan obligations and
collateralised debt obligations.
Equity investments (including venture capital)

Unlisted equities and fund investments are accounted for as trading and other financial assets at fair value through profit or loss or as available-for-sale financial
assets. These investments are valued using different techniques as a result of the variety of investments across the portfolio in accordance with the Group’s valuation
policy and are calculated using International Private Equity and Venture Capital Guidelines.
Depending on the business sector and the circumstances of the investment, unlisted equity valuations are based on earnings multiples, net asset values or discounted
cash flows.
––A number of earnings multiples are used in valuing the portfolio including price earnings, earnings before interest and tax and earnings before interest, tax,
depreciation and amortisation. The particular multiple selected being appropriate for the type of business being valued and is derived by reference to the current
market-based multiple. Consideration is given to the risk attributes, growth prospects and financial gearing of comparable businesses when selecting an appropriate
multiple.
––Discounted cash flow valuations use estimated future cash flows, usually based on management forecasts, with the application of appropriate exit yields or terminal
multiples and discounted using rates appropriate to the specific investment, business sector or recent economic rates of return. Recent transactions involving the
sale of similar businesses may sometimes be used as a frame of reference in deriving an appropriate multiple.
––For fund investments the most recent capital account value calculated by the fund manager is used as the basis for the valuation and adjusted, if necessary, to
align valuation techniques with the Group’s valuation policy.
Derivatives
Where the Group’s derivative assets and liabilities are not traded on an exchange, they are valued using valuation techniques, including discounted cash flow and
options pricing models, as appropriate. The types of derivatives classified as level 2 and the valuation techniques used include:
––Interest rate swaps which are valued using discounted cash flow models; the most significant inputs into those models are interest rate yield curves which are
developed from publicly quoted rates.
––Foreign exchange derivatives that do not contain options which are priced using rates available from publicly quoted sources.
––Credit derivatives are valued using standard models with observable inputs, except for the items classified as level 3, which are valued using publicly available yield
and credit default swap (CDS) curves.
––Less complex interest rate and foreign exchange option products which are valued using volatility surfaces developed from publicly available interest rate cap,
interest rate swaption and other option volatilities; option volatility skew information is derived from a market standard consensus pricing service. For more complex
option products, the Group calibrates its models using observable at-the-money data; where necessary, the Group adjusts for out-of-the-money positions using a
market standard consensus pricing service.
Complex interest rate and foreign exchange products where there is significant dispersion of consensus pricing or where implied funding costs are material and
unobservable are classified as level 3.
Where credit protection, usually in the form of credit default swaps, has been purchased or written on asset-backed securities, the security is referred to as a negative
basis asset-backed security and the resulting derivative assets or liabilities have been classified as either level 2 or level 3 according to the classification of the
underlying asset-backed security.
77
Movement in level 3 portfolio

The table below analyses movements in the level 3 financial assets portfolio:
Trading and
other
financial
assets at
fair value
through Total
profit or Available- Derivative financial
loss for-sale assets assets
The Group £m £m £m £m
At 1 January 2010 1,125 1,865 74 3,064
Exchange and other adjustments 29 12 2 43
Gains (losses) recognised in the income statement 44 (56) (37) (49)
Gains recognised in other comprehensive income – 265 – 265
Purchases 190 497 – 687
Sales (75) (502) – (577)
Transfers into the level 3 portfolio 9 – 226 235
Transfers out of the level 3 portfolio (738) (15) – (753)
At 31 December 2010 584 2,066 265 2,915
Exchange and other adjustments (6) (38) – (44)
Gains recognised in the income statement 34 78 39 151
Losses recognised in other comprehensive income – (163) – (163)
Purchases 6 341 – 347
Sales (389) (474) – (863)
Transfers into the level 3 portfolio 331 28 47 406
At 31 December 2011 432 1,825 351 2,608
Gains recognised in the income statement relating to those assets held at 31 December 2011 23 31 74 128
Losses recognised in other comprehensive income relating to those assets held at 31 December 2011 – (147) – (147)
Gains (losses) recognised in the income statement relating to those assets held at 31 December 2010 34 (88) (37) (91)
Gains recognised in other comprehensive income relating to those assets held at 31 December 2010 – 269 – 269
The table below analyses movements in the level 3 financial liabilities portfolio:
Total
Derivative Financial financial
liabilities guarantees liabilities
£m £m £m
At 1 January 2010 196 – 196
Exchange and other adjustments 14 – 14
Purchases – 12 12
Sales (210) – (210)
Transfers into the level 3 portfolio 34 – 34
At 31 December 2010 34 12 46
Losses recognised in the income statement 3 5 8
Transfers out of the level 3 portfolio (20) – (20)
At 31 December 2011 31 17 48
Losses recognised in the income statement relating to those liabilities held at 31 December 2011 (1) (5) (6)
Gains (losses) recognised in the income statement relating to those liabilities held at 31 December 2010 – – –
Transfers out of the level 3 portfolio arise when inputs that could have a significant impact on the instrument’s valuation become market observable after previously
having been non-market observable. In the case of asset-backed securities this can arise if more than one consistent independent source of data becomes available.
Conversely transfers into the portfolio arise when consistent sources of data cease to be available.
Included within the gains (losses) recognised in the income statement are gains of £128 million (2010: losses of £91 million) related to financial instruments that
are held in the level 3 portfolio at the year end. These amounts are included in other operating income.
Included within the gains (losses) recognised in other comprehensive income are losses of £147 million (2010: gains of £269 million) related to financial
instruments that are held in the level 3 portfolio at the year end.
78
Movement in level 3 portfolio

The table below analyses movements in the level 3 financial assets portfolio:
Trading and
other
financial
assets at
fair value
through Total
profit or Available- Derivative financial
loss for-sale assets assets
The Bank £m £m £m £m
At 1 January 2010 903 81 74 1,058
Exchange and other adjustments 27 39 2 68
Gains (losses) recognised in the income statement 10 35 (37) 8
Gains recognised in other comprehensive income – (27) – (27)
Purchases 110 1 – 111
Sales (21) (78) – (99)
Transfers into the level 3 portfolio – – 226 226
At 31 December 2010 291 40 265 596
Exchange and other adjustments (5) (1) – (6)
Gains recognised in the income statement 14 (6) 39 47
Losses recognised in other comprehensive income – 1 – 1
Purchases 1 – – 1
Sales (201) (3) – (204)
Transfers into the level 3 portfolio 189 37 47 273
At 31 December 2011 289 68 351 708
Gains recognised in the income statement relating to those assets held at 31 December 2011 14 – 74 88
Losses recognised in other comprehensive income relating to those assets held at 31 December 2011 – (2) – (2)
Gains (losses) recognised in the income statement relating to those assets held at 31 December 2010 10 – (37) (27)
Gains recognised in other comprehensive income relating to those assets held at 31 December 2010 – – – –
The table below analyses movements in the level 3 financial liabilities portfolio:
Total
Derivative Financial financial
liabilities guarantees liabilities
£m £m £m
At 1 January 2010 117 – 117
Exchange and other adjustments 9 – 9
Purchases – 12 12
Sales (126) – (126)
At 31 December 2010 34 12 46
Losses recognised in the income statement 3 5 8
Transfers out of the level 3 portfolio (20) – (20)
At 31 December 2011 31 17 48
Losses recognised in the income statement relating to those liabilities held at 31 December 2011 (1) (5) (6)
Gains (losses) recognised in the income statement relating to those liabilities held at 31 December 2010 – – –
Included within the gains (losses) recognised in the income statement are gains of £88 million (2010: losses of £27 million) related to financial instruments that
are held in the level 3 portfolio at the year end. These amounts are included in other operating income.
Included within the gains (losses) recognised in other comprehensive income are losses of £2 million (2010: £nil) related to financial instruments that are held at
the year end.
79
Level 3 portfolio
At 31 December 2011 At 31 December 2010
Effect of reasonably Effect of reasonably
possible alternative possible alternative
assumptions assumptions
Carrying Favourable Unfavourable Carrying Favourable Unfavourable
value changes changes value changes changes
Valuation basis/technique Main assumptions £m £m £m £m £m £m
Trading and other financial assets at fair value through profit or loss:
Asset-backed securities Lead manager or broker Use of single pricing 203 1 (1) 191 6 (6)
quote/consensus pricing source
from market data provider
Equity and venture capital Various valuation Earnings, net asset 229 16 (19) 390 74 (58)
investments techniques value and earnings
multiples, property
prices, forecast
cash flows
Unlisted equities and property Third party valuations n/a – – – 3 – –
partnerships in the life funds
432 584
Equity and venture capital Various valuation Earnings, net asset 1,825 183 (88) 2,066 141 (91)
investments techniques value, underlying
asset values, property
prices, forecast
cash flows
Derivative financial assets Industry standard model/ Prepayment rates, 351 58 (23) 265 34 (8)
consensus pricing from probability of default,
market data provider loss given default and
yield curves
Financial assets 2,608 2,915
Derivative financial liabilities Industry standard model/ Prepayment rates, 31 – – 34 – –

consensus pricing from probability of default,
market data provider loss given default and
yield curves
Financial guarantees 17 – – 12 – –
Financial liabilities 48 46
Sensitivity of level 3 valuations

Asset-backed securities
Reasonably possible alternative valuations have been calculated for asset-backed securities by using alternative pricing sources and calculating an absolute difference.
The pricing difference is defined as the absolute difference between the actual price used and the closest, alternative price available.
Derivative financial instruments

(i) In respect of the embedded equity conversion feature of the enhanced capital notes, the sensitivity was based on the absolute difference between the actual price
of the enhanced capital note and the closest, alternative broker quote available plus the impact of applying a 10 bps increase/decrease in the market yield used
to derive a market price for similar bonds without the conversion feature. The effect of interdependency of the assumptions is not material to the effect of applying
reasonably possible alternative assumptions to the valuations of derivative financial instruments.
(ii) In respect of credit default swaps written on level 3 negative basis asset-backed securities, reasonably possible alternative valuations have been calculated by
flexing the spread between the underlying asset and the credit default swap, or adjusting market yields, by a reasonable amount. The sensitivity is determined
by applying a 60 bps increase/decrease in the spread between the asset and the credit default swap.
Venture capital and equity investments

The valuation techniques used for unlisted equities and venture capital investments vary depending on the nature of the investment, as described in the valuation
methodology section above. Reasonably possible alternative valuations for these investments have been calculated by reference to the relevant approach taken as
appropriate to the business sector and investment circumstances and as such the following inputs have been considered:
––for valuations derived from earnings multiples, consideration is given to the risk attributes, growth prospects and financial gearing of comparable businesses when
selecting an appropriate multiple;
––the discount rates used in discounted cash flow valuations; and
––in line with International Private Equity and Venture Capital Guidelines, the values of underlying investments in fund investments portfolios.
80
(4) Transferred financial assets that are not derecognised

Repurchase and securities lending transactions
The Group enters into repurchase and securities lending transactions in the normal course of business that do not result in derecognition of the financial assets
concerned. The carrying value of financial assets transferred under such arrangements, that did not qualify for derecognition, and their associated liabilities are
as follows:
2011 2010
Carrying Carrying Carrying Carrying
value of value of value of value of
transferred associated transferred associated
assets liabilities assets liabilities
£m £m £m £m
Trading and other financial assets at fair value through profit or loss 890 883 864 873
Debt securities classified as loans and receivables 7,918 7,559 8,020 7,081
Available-for-sale financial assets 2,437 2,260 3,007 2,840
Total 11,245 10,702 11,891 10,794
In all cases the transferee has the right to sell or repledge the assets concerned.
Securitisations and covered bonds

Details about the Group’s securitisation and covered bond programmes, which may also result in financial assets not being derecognised in full, are provided in
note 17.
46 Financial risk management
Financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with financial instruments represent a significant
component of the risks faced by the Group.
The primary risks affecting the Group through its use of financial instruments are: credit risk; market risk, which includes interest rate risk and currency risk; and
liquidity risk. Qualitative and quantitative information about the Group’s management of these risks is given below.
(1) Credit risk

The Group’s credit risk exposure arises in respect of the instrument below and predominantly in the United Kingdom, the European Union, Australia and the United
States. Credit risk appetite is set at Board level and is described and reported through a suite of metrics devised from a combination of accounting and credit portfolio
performance measures, which include the use of various credit risk rating systems as inputs. The Group uses a range of approaches to mitigation credit risk, including
internal control policies, obtaining collateral, using master netting agreements and other credit risk transfers, such as asset sales and credit derivatives based
transactions.
81
46 Financial risk management (continued)
A. Maximum credit exposure

The maximum credit risk exposure of the Group in the event of other parties failing to perform their obligations is detailed below. No account is taken of any collateral
held and the maximum exposure to loss is considered to be the balance sheet carrying amount or, for non-derivative off-balance sheet transactions and financial
guarantees, their contractual nominal amounts.
The Group The Bank

2011 2010 2011 2010
£m £m £m £m
Loans and advances to banks, net1 89,490 61,349 89,270 61,024
Loans and advances to customers, net1 376,355 405,525 386,184 415,628
Debt securities, net1 11,886 23,632 15,407 17,433
Deposit amounts available for offset2 (2) (3,920) (2) (3,920)
477,729 486,586 490,859 490,165
Available-for-sale financial assets (excluding equity shares) 6,408 12,255 5,843 12,424
Trading and other financial assets at fair value through profit or loss (excluding equity shares):
Loans and advances 18,790 16,218 18,790 16,218
Debt securities, treasury and other bills 3,239 8,151 3,138 8,151
22,029 24,369 21,928 24,369
Derivative assets:
Derivative assets, before offsetting under master netting arrangements 36,283 29,451 35,820 27,362
Amounts available for offset under master netting arrangements2 (22,816) (18,799) (22,786) (18,799)
13,467 10,652 13,034 8,563
Financial guarantees 2,993 9,227 2,661 9,047
Irrevocable loan commitments and other credit-related contingencies3 15,874 23,155 14,227 21,159
Maximum credit risk exposure 538,500 566,244 548,552 565,727
Maximum credit risk exposure before offset items 561,318 588,963 571,340 588,446
1
Amounts shown net of related impairment allowances.
2
Deposit amounts available for offset and amounts available for offset under master netting arrangements do not meet the criteria under IAS 32 to enable loans and
advances and derivative assets respectively to be presented net of these balances in the financial statements.
3
See note 44 – Contingent liabilities and commitments for further information.
82
B. Credit quality of assets

Loan and receivables
The analysis of lending between retail and wholesale has been prepared based upon the type of exposure and not the business segment in which the exposure is
recorded. Included within retail are exposures to personal customers and small businesses, whilst included within wholesale are exposures to corporate customers
and other large institutions.
Loans and advances – The Group
Loans and
advances
designated
at fair value
Loans and advances to customers
Loans and through
advances to Retail Retail profit or
banks – mortgages – other Wholesale Total loss
£m £m £m £m £m £m
31 December 2011
Neither past due nor impaired 3,684 226,256 12,715 68,006 306,977 11,051
Past due but not impaired – 10,329 439 1,821 12,589 –
Impaired – no provision required 6 940 689 2,935 4,564 –
– provision held – 5,697 533 38,403 44,633 –
Gross 3,690 243,222 14,376 111,165 368,763 11,051
Allowance for impairment losses (note 20) – (2,432) (499) (20,420) (23,351) –
Net 3,690 240,790 13,877 90,745 345,412 11,051
Due from fellow Lloyds Banking Group undertakings 85,800 30,943 7,739
Total loans and advances 89,490 376,355 18,790
31 December 2010
Impaired – no provision required – 1,532 61 4,394 5,987 –
– provision held – 4,358 1,291 40,402 46,051 –
Gross 6,296 246,743 16,670 133,063 396,476 12,220
Net 6,296 244,960 15,987 110,213 371,160 12,220
The criteria that the Group uses to determine that there is objective evidence of an impairment loss are disclosed in note 2h. All impaired loans which exceed certain
thresholds are individually assessed for impairment by reviewing expected future cash flows including those that could arise from the realisation of security. Included
in loans and receivables are advances individually determined to be impaired with a gross amount before impairment allowances of £41,984 million.
Loans and advances which are neither past due nor impaired – The Group
Loans and
advances
designated
at fair value
Loans and through
£m £m £m £m £m £m
31 December 2011
Good quality 3,640 219,014 7,823 25,630 11,047
Satisfactory quality 38 5,035 3,858 17,560 4
Lower quality – 951 410 17,777 –
Below standard, but not impaired 6 1,256 624 7,039 –
Total loans and advances which are neither past due nor impaired 3,684 226,256 12,715 68,006 306,977 11,051
31 December 2010
Good quality 6,296 224,271 10,490 16,481 12,219
Satisfactory quality – 4,217 2,934 19,046 1
Lower quality – 834 513 37,748 –
Below standard, but not impaired – 802 952 12,000 –
83
The definitions of good quality, satisfactory quality, lower quality and below standard, but not impaired applying to retail and wholesale are not the same, reflecting
the different characteristics of these exposures and the way they are managed internally, and consequently totals are not provided. Wholesale lending has been
classified using internal probability of default rating models mapped so that they are comparable to external credit ratings. Good quality lending comprises the lower
assessed default probabilities, with other classifications reflecting progressively higher default risk. Classifications of retail lending incorporate expected recovery levels
for mortgages, as well as probabilities of default assessed using internal rating models.
Loans and advances which are past due but not impaired – The Group
Loans and
advances
designated
at fair value
Loans and through
£m £m £m £m £m £m
31 December 2011
0-30 days – 4,746 324 974 6,044 –
30-60 days – 2,120 91 386 2,597 –
60-90 days – 1,524 19 151 1,694 –
90-180 days – 1,939 4 114 2,057 –
Over 180 days – – 1 196 197 –
Total loans and advances which are past due but not impaired – 10,329 439 1,821 12,589 –
31 December 2010
0-30 days – 5,256 293 1,098 6,647 –
30-60 days – 2,183 108 478 2,769 –
60-90 days – 1,483 25 350 1,858 –
90-180 days – 1,807 3 313 2,123 –
Over 180 days – – – 753 753 –
A financial asset is ‘past due’ if a counterparty has failed to make a payment when contractually due.
Loans and advances – The Bank

Loans and
advances
designated
at fair value
Loans and through
£m £m £m £m £m £m
31 December 2011
Impaired – no provision required 6 786 613 2,771 4,170 –
– provision held – 4,971 476 36,691 42,138 –
Gross 3,470 232,118 11,647 101,988 345,753 11,051
Net 3,470 229,962 11,163 82,878 324,003 11,051
31 December 2010
Impaired – no provision required – 1,386 61 4,146 5,593 –
– provision held – 3,671 1,163 36,510 41,344 –
Gross 5,971 234,846 13,542 117,555 365,943 12,220
Net 5,971 233,309 12,906 97,006 343,221 12,220
84
Loans and advances which are neither past due nor impaired – The Bank
Loans and
advances
designated
at fair value
Loans and through
£m £m £m £m £m £m
31 December 2011
Good quality 3,420 210,304 5,789 24,494 11,047
Satisfactory quality 38 4,665 3,570 13,217 4
Lower quality – 900 397 16,233 –
Below standard, but not impaired 6 1,174 608 6,803 –
31 December 2010
Good quality 5,971 214,547 7,914 15,543 12,219
Satisfactory quality – 3,983 2,728 12,830 1
Lower quality – 801 494 34,633 –
Below standard, but not impaired – 776 926 11,136 –
Loans and advances which are past due but not impaired – The Bank
Loans and
advances
designated
at fair value
Loans and through
£m £m £m £m £m £m
31 December 2011
0-30 days – 4,341 143 948 5,432 –
30-60 days – 1,930 45 386 2,361 –
60-90 days – 1,364 6 151 1,521 –
90-180 days – 1,683 – 114 1,797 –
Over 180 days – – – 180 180 –
31 December 2010
0-30 days – 4,829 175 960 5,964 –
30-60 days – 1,966 69 434 2,469 –
60-90 days – 1,314 12 323 1,649 –
90-180 days – 1,573 – 313 1,886 –
Over 180 days – – – 727 727 –
85
Debt securities classified as loans and receivables

An analysis by credit rating of debt securities classified as loans and receivables is provided below:
Rated BB
AAA AA A BBB or lower Not rated Total
At 31 December 2011
Mortgage-backed securities 1,770 2,043 1,087 909 307 918 7,034
Other asset-backed securities 3,603 374 331 126 304 – 4,738
5,373 2,417 1,418 1,035 611 918 11,772
Corporate and other debt securities – – 25 – – 364 389
5,373 2,417 1,443 1,035 611 1,282 12,161
Due from fellow Group undertakings:
Mortgage-backed securities 224
Corporate and other debt securities 649
Total debt securities classified as loans and receivables 13,034
At 31 December 2010
Other asset-backed securities 7,467 2,265 1,237 330 596 94 11,989
14,213 5,097 2,380 1,199 654 179 23,722
Corporate and other debt securities – – – – – 658 658
14,213 5,097 2,380 1,199 654 837 24,380
Due from fellow Group undertakings: mortgage-backed securities 543
Rated BB
At 31 December 2011
Mortgage-backed securities 1,727 1,246 898 407 742 1,233 6,253
Other asset-backed securities 3,532 54 95 – 220 – 3,901
5,259 1,300 993 407 962 1,233 10,154
Corporate and other debt securities – – 25 – – 160 185
5,259 1,300 1,018 407 962 1,393 10,339
Due from fellow Group undertakings: mortgage-backed securities 6,201
At 31 December 2010
Other asset-backed securities 6,280 713 280 33 443 – 7,749
12,925 2,613 1,302 412 513 85 17,850
12,925 2,613 1,302 412 513 354 18,119
Due from fellow Group undertakings: mortgage-backed securities 583
18,702
86
Available-for-sale financial assets (excluding equity shares)
An analysis of available-for-sale financial assets is included in note 21. The credit quality of available-for-sale financial assets (excluding equity shares) is set out below:
Rated BB
At 31 December 2011
Debt securities:
Government securities 1 74 – – – – 75
Bank and building society certificates of deposit – – 32 – – – 32
Mortgage-backed securities 469 121 116 83 – – 789
Other asset-backed securities 83 – – – – – 83
552 121 116 83 – – 872
Corporate and other debt securities 1,591 856 2,315 303 – 67 5,132
2,144 1,051 2,463 386 – 67 6,111
Due from fellow Group undertakings: corporate and other debt securities 297
Total held as available-for-sale financial assets 6,408
At December 2010
Debt securities:
Mortgage-backed securities 15 – – – – – 15
Other asset-backed securities 61 – 105 – – 15 181
76 – 105 – – 15 196
Corporate and other debt securities 1,135 3,990 4,744 735 42 9 10,655
1,212 4,068 4,978 735 42 24 11,059
Treasury and other bills 483 – – – – – 483
1,695 4,068 4,978 735 42 24 11,542
The Bank
At 31 December 2011
Debt securities:
Asset-backed securities 36 – – – – – 36
Corporate and other debt securities 1,591 856 2,315 303 – 67 5,132
1,628 930 2,347 303 – 67 5,275
Due from fellow Group undertakings: asset-backed securities and
corporate and other securities 568
At 31 December 2010
Debt securities:
Government securities – 78 – – – – 78
Asset-backed securities 41 – 105 – – 799 945
Corporate and other debt securities 1,135 3,990 4,744 735 42 38 10,684
Total debt securities held as available-for-sale assets 1,176 4,068 4,978 735 42 837 11,836
1,659 4,068 4,978 735 42 837 12,319
87
Debt securities, treasury and other bills held at fair value through profit or loss
An analysis of trading and other financial assets at fair value through profit or loss is included in note 13. The credit quality of debt securities, treasury and other bills
held at fair value through profit or loss is set out below.
Rated BB
At 31 December 2011
Trading assets
Government securities 992 – – – – – 992
Bank and building society certificates of deposit – 1,062 322 – – – 1,384
Other asset-backed securities – 151 52 – – – 203
Corporate and other debt securities 201 – – 100 – – 301
Total debt securities held as trading assets 1,193 1,213 374 100 – – 2,880
Total held as trading assets 1,417 1,213 374 100 – – 3,104
Other assets held at fair value through profit or loss
Corporate and other debt securities 96 – – – – 39 135
Total held at fair value through profit or loss 1,513 1,213 374 100 – 39 3,239
At 31 December 2010
Trading assets
Government securities 518 885 – – – – 1,403
Bank and building society certificates of deposit – 3,086 506 100 – – 3,692
Other asset-backed securities 191 633 149 – – – 973
Corporate and other debt securities 1,125 200 411 19 – – 1,755
Total debt securities held as trading assets 1,834 4,804 1,066 119 – – 7,823
Treasury and other bills 219 8 – – – – 227
Total held as trading assets 2,053 4,812 1,066 119 – – 8,050
Total held at fair value through profit or loss 2,053 4,812 1,066 119 – 101 8,151
88
Rated BB
At 31 December 2011
Trading assets
Government securities 992 – – – – – 992
Bank and building society certificates of deposit – 1,062 322 – – – 1,384
Other asset-backed securities – 151 52 – – – 203
Corporate and other debt securities 201 – – 100 – – 301
Total debt securities held as trading assets 1,193 1,213 374 100 – – 2,880
Total held as trading assets 1,417 1,213 374 100 – – 3,104
Total held at fair value through profit or loss 1,417 1,213 374 100 – 34 3,138
At 31 December 2010
Trading assets
Government securities 518 885 – – – – 1,403
Bank and building society certificates of deposit – 3,086 506 100 – – 3,692
Other asset-backed securities 191 633 149 – – – 973
Corporate and other debt securities 1,125 200 411 19 – – 1,755
Total debt securities held as trading assets 1,834 4,804 1,066 119 – – 7,823
Treasury and other bills 219 8 – – – – 227
Total held as trading assets 2,053 4,812 1,066 119 – – 8,050
Total held at fair value through profit or loss 2,053 4,812 1,066 119 – 101 8,151
89
Derivative assets
An analysis of derivative assets is given in note 14. The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the
form of cash or highly liquid securities. In respect of the Group’s maximum credit risk relating to derivative assets of £13,467 million for the Group and £13,034 million
for the Bank (2010: £10,652 million for the Group and £8,563 million for the Bank), cash collateral of £2,249 million for the Group and £2,249 million for the
Bank (2010: £1,322 million for the Group and £1,322 million for the Bank) was held and a further £1,303 million for the Group and £928 million for the Bank
was due from OECD banks (2010: £2,441 million for the Group and £636 million for the Bank).
Rated BB
£m £m £m £m £m £m £m
Derivative financial instruments

The Group
At 31 December 2011
Trading 166 10,095 6,117 2,709 1,769 1,705 22,561
Hedging – 6,051 2,831 590 2 23 9,497
166 16,146 8,948 3,299 1,771 1,728 32,058
Due from fellow Group undertakings 4,225
Total derivative financial instruments 36,283
At 31 December 2010
Trading 49 5,462 11,107 457 – 4,854 21,929
Hedging 35 1,985 3,936 46 – 24 6,026
84 7,447 15,043 503 – 4,878 27,955
The Bank
At 31 December 2011
Trading – 10,090 5,853 2,709 1,769 1,675 22,096

Hedging – 6,051 2,831 590 2 23 9,497
– 16,141 8,684 3,299 1,771 1,698 31,593
At 31 December 2010
Trading 43 5,322 9,480 457 – 4,517 19,819
Hedging 35 1,985 3,936 46 – 24 6,026
78 7,307 13,416 503 – 4,541 25,845
Financial guarantees and irrevocable loan commitments
These represent undertakings that the Group will meet a customer’s obligation to third parties if the customer fails to do so. Commitments to extend credit represent
unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal
to the total guarantees or unused commitments, however, the likely amount of loss is expected to be significantly less; most commitments to extend credit are
contingent upon customers maintaining specific credit standards.
90
C. Collateral held as security for financial assets

The Group holds collateral against loans and receivables and irrevocable loan commitments; qualitative and, where appropriate, quantitative information is provided
in respect of this collateral below. Collateral held as security for trading and other financial assets at fair value through profit or loss and for derivative assets is also
shown below.
Loans and receivables

The disclosures below are produced under the combined businesses approach used for the Group’s segmental reporting. The Group believes that, for reporting
periods immediately following a significant acquisition, such as the acquisition of HBOS in 2009, this combined businesses basis, which includes the allowance for
loan losses at the acquisition on a gross basis, more fairly reflects the underlying provisioning status of the loans.
The Group holds collateral in respect of loans and advances to banks and customers as set out below. The Group does not hold collateral against debt securities,
comprising asset-backed securities and corporate and other debt securities, which are classified as loans and receivables.
Loans and advances to banks

The Group may require collateral before entering into a credit commitment with another bank, depending on the type of financial product and the counterparty
involved, and netting arrangements are obtained whenever possible and to the extent that such agreements are legally enforceable. Collateral is held as part of reverse
repurchase or securities borrowing transactions.
There were reverse repurchase agreements which are accounted for as collateralised loans within loans and advances to banks with a carrying value of £2,950 million
for the Group and the Bank (2010: £20,664 million for the Group and the Bank), against which collateral is held with a fair value of £2,950 million for the Group
and the Bank (2010: £20,626 million for the Group and the Bank), all of which the Group and the Bank are able to repledge. Included in these amounts are in
2010 collateral balances in the form of cash provided in respect of reverse repurchase agreements amounting to £4 million for the Group and the Bank.
These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.

The Group holds collateral against loans and advances to customers in the form of mortgages over residential and commercial real estate, charges over business
assets such as premises, inventory and accounts receivable, charges over financial instruments such as debt securities and equities, and guarantees received from
third parties.
Retail lending
Mortgages
An analysis by loan-to-value ratio of the Group’s residential mortgage lending is provided below. The value of collateral used in determining the loan-to-value ratios
has been estimated based upon the last actual valuation, adjusted to take into account subsequent movements in house prices, after making allowance for indexation
error and dilapidations.
91
The Group
Neither
past due Past due
nor but not
impaired impaired Impaired Gross
£m £m £m £m
31 December 2011
Less than 70 per cent 85,775 2,382 1,055 89,212
70 per cent to 80 per cent 42,089 1,532 672 44,293
Greater than 100 per cent 30,397 2,743 3,048 36,188
Total 226,256 10,329 6,637 243,222
Neither
past due
nor Past due but
impaired not impaired Impaired Gross
£m £m £m £m
31 December 2010
Less than 70 per cent 85,719 2,428 947 89,094
90 per cent to 100 per cent 31,558 1,992 1,015 34,565
Total 230,124 10,729 5,890 246,743
The Bank
Neither
past due Past due
nor but not
impaired impaired Impaired Gross
£m £m £m £m
31 December 2011
Total 217,043 9,318 5,757 232,118
Neither
past due
nor Past due but
impaired not impaired Impaired Gross
£m £m £m £m
31 December 2010
Total 220,107 9,682 5,057 234,846
Other
No collateral is held in respect of retail credit cards, or overdrafts, or unsecured personal loans. For non-mortgage retail lending to small businesses, collateral will
often include second charges over residential property and the assignment of life cover.
The majority of non-mortgage retail lending is unsecured. At 31 December 2011, total non-mortgage lending amounted to £14,376 million (2010: £16,670
million), against which the Group held an impairment allowance of £499 million (2010: £683 million). Gross impaired non-mortgage retail lending amounted to
£1,222 milion (2010: £1,352 million). The fair value of the collateral held in respect of this lending was £9 million (2010: £40 million). In determining the fair
value of collateral, no specific amounts have been attributed to the costs of realisation and the value of collateral for each loan has been limited to the principal
amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer representation of the Group’s exposure.
92
Unimpaired non-mortgage retail lending amounted to £13,154 million (2010: £15,318 million). Lending decisions are predominantly based on an obligor’s ability
to repay from normal business operations rather than reliance on the disposal of any security provided. Collateral values are rigorously assessed at the time of loan
origination and are thereafter monitored in accordance with business unit credit policy.
The Group credit risk disclosures for unimpaired non-mortgage retail lending report assets gross of collateral and therefore disclose the maximum loss exposure. The
Group believes that this approach is appropriate. The value of collateral is re-assessed if there is observable evidence of distress of the borrower. Unimpaired
non‑mortgage retail lending, including any associated collateral, is managed on a customer-by-customer basis rather than a portfolio basis. No aggregated collateral
information for the entire unimpaired non-mortgage retail lending portfolio is provided to key management personnel.
Wholesale lending
Reverse repurchase transactions
There were reverse repurchase agreements which are accounted for as collateralised loans with a carrying value of £14,250 million for the Group and the Bank
(2010: £2,579 million for the Group and the Bank), against which the Group held collateral with a fair value of £14,254 million for the Group and the Bank (2010:
£2,477 million for the Group and the Bank), all of which the Group and the Bank are able to repledge. Included in these amounts are collateral balances in the form
of cash provided in respect of reverse repurchase agreements amounting to £34 million for the Group and the Bank (2010: £42 million for the Group and the Bank).
Impaired lending
The value of collateral is re-evaluated and its legal soundness re-assessed if there is observable evidence of distress of the borrower; this evaluation is used to
determine potential loss allowances and management’s strategy to try to either repair the business or recover the debt. At 31 December 2011, total wholesale lending
amounted to £111,165 million (2010: £133,063 million), against which the Group held an impairment allowance of £20,420 million (2010: £22,850 million).
Gross impaired wholesale lending amounted to £41,338 million (2010: £44,796 million). The fair value of the collateral held in respect of impaired wholesale
lending which is secured was £12,301 million (2010: £12,805 million). In determining the fair value of collateral, no specific amounts have been attributed to the
costs of realisation. For the purposes of determining the total collateral held by the Group in respect of impaired secured wholesale lending, the value of collateral for
each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer
representation of the Group’s exposure.
Impaired secured wholesale lending and associated collateral relates to lending to property companies and to customers in the financial, business and other services;
transport, distribution and hotels; and construction industries.
Unimpaired lending
Wholesale unimpaired secured lending amounted to £69,827 million (2010: £88,267 million). Wholesale lending decisions are predominantly based on an
obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided. Collateral values are rigorously assessed at
the time of loan origination and are monitored throughout the credit lifecycle in accordance with business unit credit policy, which varies according to the type of
lending and collateral involved. The types of collateral taken and the frequency with which collateral is required at origination is dependent upon the size and structure
of the borrower. For exposures to corporate customers and other large institutions, the Group will often require the collateral to include a first charge over land and
buildings owned and occupied by the business, a mortgagee debenture over the company’s undertaking and one or more of its assets, and keyman insurance. Where
agreements take the form of a standard ISDA master netter agreeing, the collateral may be in the form of cash or marketable securities, as required. The Group
maintains policies setting out acceptable collateral, maximum loan-to-value ratios and other criteria to be considered when reviewing a loan application. The decision
as to whether or not collateral is required will be based upon the nature of the transaction and the credit worthiness of the customer. Other than for project finance,
object finance and income producing real estate where charges over the subject assets are a basic requirement, the provision of collateral will not determine the
outcome of a credit application. The fundamental business proposition must evidence the ability of the business to generate funds from normal business sources to
repay debt.
The extent to which collateral values are actively managed will depend on the credit quality and other circumstances of the obligor. Although lending decisions are
predominantly based on expected cash flows, any collateral provided may impact the pricing and other terms of a loan or facility granted; this will have a financial
impact on the amount of net interest income recognised and on internal loss-given-default estimates that contribute to the determination of asset quality.
For unimpaired wholesale lending which is secured, the Group reports assets gross of collateral and therefore discloses the maximum loss exposure. The Group
believes that this approach is appropriate as collateral values at origination and during a period of good performance may not be representative of the value of
collateral if the obligor enters a distressed state.
Unimpaired secured wholesale lending is predominantly managed on a cash flow basis. On occasion, it may include an assessment of underlying collateral,
although, for impaired lending, this will not always involve assessing it on a fair value basis. No aggregated collateral information for the entire unimpaired secured
wholesale lending portfolio is provided to key management personnel.
Trading and other financial assets at fair value through profit or loss (excluding equity shares)
In respect of trading and other financial assets at fair value through profit or loss, the fair value of collateral accepted under reverse repurchase transactions which
are accounted for as collateralised loans that the Group is permitted by contract or custom to sell or repledge was £23,655 million for the Group and the Bank
(2010: £17,632 million for the Group and the Bank). Of this, £20,055 million for the Group and the Bank (2010: £7,261 million for the Group and the Bank) was
sold or repledged.
In addition, securities held as collateral in the form of stock borrowed amounted to £53,395 million for the Group and the Bank (2010 £65,766 million for the
Group and the Bank). Of this amount, £44,896 million for the Group and the Bank (2010: £65,435 million for the Group and the Bank) had been resold or
repledged as collateral for the Group’s own transactions.
Derivative assets, after offsetting of amounts under master netting arrangements

The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of
the net derivative assets after offsetting of amounts under master netting arrangements of £13,467 million for the Group and £13,034 million for the Bank
(2010: £10,652 million for the Group and £8,063 million for the Bank), cash collateral of £2,249 million for the Group and the Bank (2010: £1,322 million for
the Group and the Bank) was held.
93
Irrevocable loan commitments and other credit-related contingencies

At 31 December 2011, there were irrevocable loan commitments and other credit-related contingencies of £15,874 million for the Group and £14,227 million for
the Bank (2010: £23,155 million for the Group and £21,159 million for the Bank). Collateral is held as security, in the event that lending is drawn down, on
£4,204 million for the Group and the Bank (2010: £6,345 million for the Group and the Bank) of these balances.
Lending decisions in respect of irrevocable loan commitments are based on the obligor’s ability to repay from normal business operations rather than reliance on the
disposal of any security provided. For wholesale commitments, it is the Group’s practice to request collateral whose value is commensurate with the nature of the
commitment. For retail mortgage commitments, the majority are for mortgages with a loan‑to‑value ratio of less than 100 per cent. Aggregated collateral information
covering the entire balance of irrevocable loan commitments over which security will be taken is not provided to key management personnel.
D. Collateral pledged as security

Repo and stock lending transactions
The Group pledges assets primarily for repurchase agreements and securities lending transactions which are generally conducted under terms that are usual and
customary for standard securitised borrowing contracts.
The fair value of collateral pledged in respect of repurchase transactions, accounted for as secured borrowings, where the secured party is permitted by contract or
custom to repledge was £57,892 million for the Group and the Bank (2010: £85,077 million for the Group and the Bank). In addition, the following financial assets
on the balance sheet have been pledged as collateral as part of securities lending transactions:
Assets pledged
The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Trading and other financial assets at fair value through profit or loss 1,550 3,909 1,550 3,909
Loans and advances to customers 47,400 62,643 47,400 62,643
Debt securities classified as loans and receivables 1,071 5,536 1,071 5,536
Available-for-sale financial assets 1,733 3,275 1,733 3,275
51,754 75,363 51,754 75,363
In addition to the assets detailed above, the Group also holds assets that are encumbered through the Group’s asset-backed conduits and its securitisation and
covered bond programmes. Further details of these are provided in notes 17 and 18.
E. Collateral repossessed
The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Residential property 801 822 650 694
Other 8 8 2 1
809 830 652 695
In respect of retail portfolios, the Group does not take physical possession of properties or other assets held as collateral and uses external agents to realise the value
as soon as practicable, generally at auction, to settle indebtedness. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with
appropriate insolvency regulations. In certain circumstances the Group takes physical possession of assets held as collateral against wholesale lending. In such
cases, the assets are carried on the Group’s balance sheet and are classified according to the Group’s accounting policies
(2) Market risk
Interest rate risk

In the Group’s retail banking business interest rate risk arises from the different repricing characteristics of the assets and liabilities. Liabilities are either insensitive
to interest rate movements, for example interest free or very low interest customer deposits, or are sensitive to interest rate changes but bear rates which may be
varied at the Group’s discretion and that for competitive reasons generally reflect changes in the Bank of England’s base rate. There are a relatively small volume of
deposits whose rate is contractually fixed for their term to maturity.
Many banking assets are sensitive to interest rate movements; there is a large volume of managed rate assets such as variable rate mortgages which may be
considered as a natural offset to the interest rate risk arising from the managed rate liabilities. However a significant proportion of the Group’s lending assets, for
example personal loans and mortgages, bear interest rates which are contractually fixed for periods of up to five years or longer.
The Group establishes two types of hedge accounting relationships for interest rate risk: fair value hedges and cash flow hedges. The Group is exposed to fair value
interest rate risk on its fixed rate customer loans, its fixed rate customer deposits and the majority of its subordinated debt, and to cash flow interest rate risk on its
variable rate loans and deposits together with its floating rate subordinated debt. The majority of the Group’s hedge accounting relationships are fair value hedges
where interest rate swaps are used to hedge the interest rate risk inherent in the fixed rate mortgage portfolio.
At 31 December 2011 the aggregate notional principal of interest rate swaps designated as fair value hedges was £37,369 million (2010: £42,991 million) with
a net fair value asset of £3,482 million (2010: £2,813 million) (see note 14). The gains on the hedging instruments were £830 million (2010: gains of
£651 million). The losses on the hedged items attributable to the hedged risk were £845 million (2010: losses of £740 million).
In addition the Group has a small number of cash flow hedges which are primarily used to hedge the variability in the cost of funding within the wholesale business.
These cash flows are expected to occur over the next five years and the hedge accounting adjustments will be reported in the income statement as the cash flows
arise. The notional principal of the interest rate swaps designated as cash flow hedges at 31 December 2011 was £159,964 million (2010: £98,683 million) with
a net fair value liability of £1,211 million (2010: £1,301 million) (see note 14). In 2011, ineffectiveness recognised in the income statement that arises from cash
flow hedges was £2 million (2010: £94 million).
94
Currency risk
Foreign exchange exposures comprise those originating in treasury trading activities and structural foreign exchange exposures, which arise from investment in the
Group’s overseas operations.
The corporate and retail businesses incur foreign exchange risk in the course of providing services to their customers. All non-structural foreign exchange exposures
in the non-trading book are transferred to the trading area where they are monitored and controlled. These risks reside in the authorised trading centres who are
allocated exposure limits. The limits are monitored daily by the local centres and reported to the central market risk function.
Risk arises from the Group’s investments in its overseas operations. The Group’s structural foreign currency exposure is represented by the net asset value of the
foreign currency equity and subordinated debt investments in its subsidiaries and branches. Gains or losses on structural foreign currency exposures are taken to
reserves.
The Group hedges part of the currency translation risk of the net investment in certain foreign operations using cross currency borrowings.
The Group’s main overseas operations are in the Americas, Australia and Europe. Details of the Group’s structural foreign currency exposures, after net investment
hedges, are as follows:
The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Functional currency of Group operations
Euro:
Gross exposure (393) 1,479 – –
Net investment hedge (897) (3,356) – –
(1,290) (1,877) – –
US dollar:
Gross exposure 145 138 117 200
Net investment hedge (122) (145) (122) (145)
23 (7) (5) 55
Australian Dollar:
Gross exposure 1,237 1,571 – –
Net investment hedge (1,226) (1,634) – –
11 (63) – –
Other non-sterling – –
Total structural foreign currency exposures, after net investment hedges (1,256) (1,947) (5) 55
95
(3) Liquidity risk

Liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive
cost. The Group carries out monthly stress testing of its liquidity position against a range of scenarios, including those prescribed by the FSA. The Group’s liquidity
risk appetite is also calibrated against a number of stressed liquidity metrics.
The table below analyses financial instrument liabilities of the Group, on an undiscounted future cash flow basis according to contractual maturity, into relevant
maturity groupings based on the remaining period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category.
Up to 1-3 3-12 1-5 Over 5

1 month months months years years Total
The Group £m £m £m £m £m £m
At 31 December 2011
Deposits from banks 1,212 71,230 5,365 49,210 62,652 189,669
Customer deposits 168,595 10,234 20,669 38,601 15,175 253,274
Trading liabilities 10,574 2,338 2,979 2,442 2,486 20,819
Debt securities in issue 6,713 6,082 7,946 40,601 17,418 78,760
Subordinated liabilities 30 545 1,268 3,652 12,357 17,852
Total non-derivative financial liabilities 187,124 90,429 38,227 134,506 110,088 560,374
Derivative financial liabilities:
Gross settled derivatives – outflow 1,882 9,475 7,114 21,670 20,367 60,508
Gross settled derivatives – inflow (1,401) (8,680) (6,741) (20,487) (19,324) (56,633)
Gross settled derivatives – netflow 481 795 373 1,183 1,043 3,875
Gross settled derivatives liabilities 24,983 200 1,302 4,018 892 31,395
Total derivative financial liabilities 25,464 995 1,675 5,201 1,935 35,270
At 31 December 2010
Trading liabilities 14,865 2,086 2,352 102 – 19,405
Subordinated liabilities 2,084 9,117 154 2,555 1,864 15,774
Gross settled derivatives – netflow 107 (222) (88) (219) 80 (342)
Net settled derivative liabilities 2,029 1,608 5,884 11,970 3,464 24,955
Total derivative financial liabilities 2,136 1,386 5,796 11,751 3,544 24,613
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of approximately £26 million
(2010: £30 million) for the Group and the Bank per annum which is payable in respect of those instruments for as long as they remain in issue is not included
beyond five years.
96
Up to 1-3 3-12 1-5 Over 5

1 month months months years years Total
The Bank £m £m £m £m £m £m
At 31 December 2011
Trading liabilities 10,574 2,338 2,979 2,442 2,486 20,819
Subordinated liabilities 30 545 1,240 2,744 11,889 16,448
Gross settled derivatives – netflow 481 795 374 1,184 740 3,574
Net settled derivative liabilities 24,983 200 1,302 4,018 892 31,395
Total derivative financial liabilities 25,464 995 1,676 5,202 1,632 34,969
At 31 December 2010
Trading liabilities 14,865 2,086 2,352 102 – 19,405
Subordinated liabilities 12,084 18 154 1,908 1,465 15,629
Gross settled derivatives – netflow 104 (275) (88) (219) 80 (398)
Net settled derivative liabilities 2,001 1,608 5,884 11,970 3,464 24,927
Total derivative financial liabilities 2,105 1,333 5,796 11,751 3,544 24,529
97
The following tables set out the amounts and residual maturities of the Group’s off balance sheet contingent liabilities and commitments.
Within 1-3 3-5 Over 5
1 year years years years Total
The Group £m £m £m £m £m
31 December 2011
Acceptances and endorsements 3 – – – 3
Other contingent liabilities 366 71 198 149 784
Total contingent liabilities 369 71 198 149 787
Lending commitments 28,781 11,181 4,869 773 45,604
Other commitments 8 – – – 8
Total commitments 28,789 11,181 4,869 773 45,612
Total contingents and commitments 29,158 11,252 5,067 922 46,399

£m £m £m £m £m
31 December 2010
Lending commitments 38,559 3,904 7,121 2,038 51,622
Total commitments 38,561 3,904 7,121 2,038 51,624
Total contingents and commitments 39,002 3,950 7,220 2,131 52,303

The Bank £m £m £m £m £m
31 December 2011
Lending commitments 27,439 7,454 4,358 416 39,667
Total commitments 27,447 7,454 4,358 416 39,675
Total contingents and commitments 27,800 7,524 4,555 525 40,404

£m £m £m £m £m
31 December 2010
Lending commitments 44,677 2,702 6,883 1,534 55,796
Total commitments 44,679 2,702 6,883 1,534 55,798
Total contingents and commitments 45,120 2,744 6,982 1,567 56,413
98
47 Capital
Capital is actively managed at an appropriate level of frequency and regulatory ratios are a key factor in the Group’s budgeting and planning processes with updates
of expected ratios reviewed regularly during the year by the Lloyds Banking Group Senior Asset and Liability Committee. Capital raised takes account of expected
growth and currency of risk assets. Capital policies and procedures are subject to independent oversight.
The Group’s regulatory capital is divided into tiers depending on level of subordination and ability to absorb losses. Core tier 1 capital as defined in the FSA letter to the British
Bankers’ Association in May 2009, comprises mainly shareholders’ equity and non-controlling interests, after deducting goodwill, other intangible assets and 50 per cent of the
net excess of expected loss over accounting provisions and certain securitisation positions. Accounting equity is adjusted in accordance with FSA requirements, particularly in
respect of pensions and Available‑for‑Sale assets. Tier 1 capital, as defined by the European Community Banking Consolidation Directive as implemented in the UK by
the FSA’s General Prudential Sourcebook (GENPRU), is core tier 1 capital plus tier 1 capital securities less 50 per cent of material holdings in financial companies. Tier 2
capital, defined by GENPRU, comprises qualifying subordinated debt and some additional provisions and reserves after deducting 50 per cent of the excess of expected
loss over accounting provisions, and certain securitisation positions and material holdings in financial companies. Total capital is the sum of tier 1 and tier 2 capital
after deducting investments in subsidiaries and associates that are not consolidated for regulatory purposes. In the case of the Group, this means that the non-financial entities
that are held by our private equity (including venture capital) businesses, are excluded from its total regulatory capital.
The Group’s capital resources are summarised as follows:

2011 2010
£m £m
Tier 1 capital 17,432 21,470
Tier 2 capital 13,148 15,002
30,580 36,472
Supervisory deductions (983) (1,672)
Total capital 29,597 34,800
A number of limits are imposed by the FSA on the proportion of the regulatory capital base that can be made up of subordinated debt and preferred securities; for
example the amount of qualifying tier 2 capital cannot exceed that of tier 1 capital.
The minimum total capital required under pillar 1 of the Basel II framework is the Capital Resources Requirement (CRR) calculated as 8 per cent of risk weighted
assets. In addition to the minimum requirements for total capital, the FSA has made statements to explain it also operates a framework of targets and expected buffers
for core tier 1 and tier 1 capital.
In order to address the requirements of pillar 2 of the Basel II framework, the FSA currently sets additional minimum requirements through the issuance of Individual
Capital Guidance (ICG) for each UK bank calibrated by reference to the CRR. A key input into the FSA’s ICG setting process is each bank’s Internal Capital Adequacy
Assessment Process. The Group has been given an ICG by the FSA. The FSA has made it clear, however, that ICG remains a confidential matter between each bank
and the FSA.
The Group maintains its own buffer to ensure that the regulatory minimum requirements and regulatory targets and buffers are met at all times.
During the course of the year there have been a number of significant regulatory reform developments:
––‘CRD III’ came into force on 31 December 2011 resulting in increased risk weighted assets for market risk.
––The European Commission published a draft of the new Capital Requirements Directive and Regulation (‘CRDIV’) which will implement within the EU the so called
‘Basel III’ reforms for an enhanced global capital accord developed by the Basel Committee on Banking Supervision.
––In December the Government announced that it would implement the key recommendations of the UK’s Independent Commission on Banking covering the ring-
fencing of certain banking activities, ‘bail-in’ of senior unsecured debt, higher loss absorption capability and depositor preference.
––The Group is aware that there is currently a review of the endorsed ratings that may be used in IRB models and the Group is working on the assumption that no
material changes to our modelling approaches will result from the review.
Many of the details of the way these reforms will be integrated within the UK are still to be finalised. In the meantime the Group continues to monitor their
development very closely and to analyse their potential impact whilst ensuring that the Group continues to have a strong loss absorption capacity exceeding regulatory
requirements as currently formulated.
The impact of the reforms will gradually phase in as they are subject to a long transition period through to 2022. That allows time for the Group to further strengthen
its capital position as necessary through business performance and mitigating actions.
During the year, the individual entities within the Group and the Group complied with all of the externally imposed capital requirements to which they are subject.
99
48 Cash flow statements
a Change in operating assets

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Change in loans and receivables 10,246 66,274 1,491 81,695
Change in derivative financial instruments, trading and other financial assets at fair value through profit or loss (3,139) 2,996 (4,723) 1,762
Change in other operating assets 714 2,640 626 4,332
Change in operating assets 7,821 71,910 (2,606) 87,789
b Change in operating liabilities

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Change in deposits from banks 7,014 (29,717) 7,769 (26,407)
Change in customer deposits (5,658) (21,059) (11,664) (28,224)
Change in debt securities in issue (25,276) (18,397) (9,633) (25,264)
Change in derivative financial instruments and trading liabilities 10,016 (8,758) 9,962 (8,771)
Change in other operating liabilities (400) (1,258) 757 (1,304)
Change in operating liabilities (14,304) (79,189) (2,809) (89,970)
c Non-cash and other items

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Depreciation and amortisation 336 849 167 302
Impairment of tangible fixed assets 65 52 65 –
Revaluation of investment properties 17 (22) – –
Allowance for loan losses 7,021 7,732 5,513 5,169
Write-off of allowance for loan losses (8,584) (8,788) (5,884) (8,788)
Impairment of available-for-sale financial assets 749 100 292 (10)
Impairment losses on investments in subsidiaries – – 465 5,108
Customer goodwill payments provision – 500 – 500
Payment protection insurance provision 1,155 – 1,115 –
Other provision movements (55) 20 (69) 23
Unwind of discount on impairment allowances (171) (480) (393) (480)
Foreign exchange element on balance sheet1 857 (1,570) 163 (1,011)
Interest expense on subordinated liabilities 472 472 420 269
Loss (profit) on disposal of businesses 21 (38) – –
Other non-cash items 896 1,147 1,098 1,245
Total non-cash items 2,779 (26) 2,952 2,327
Payments in respect of customer goodwill payments provision (497) – (497) –
Payments in respect of payment protection insurance provision (375) – (351) –
Other 5 4 – –
Total other items (867) 4 (848) –
Non-cash and other items 1,912 (22) 2,104 2,327
When considering the movement on each line of the balance sheet, the impact of foreign exchange rate movements is removed in order to show the underlying cash impact.
1
d Analysis of cash and cash equivalents as shown in the balance sheet

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Cash and balances with central banks 3,070 2,375 3,065 2,318
Less: mandatory reserve deposits1 (499) (303) (499) (303)
2,571 2,072 2,566 2,015
Loans and advances to banks 89,490 61,349 89,270 61,024
Less: amounts with a maturity of three months or more and amounts due from fellow
Lloyds Banking Group undertakings (87,143) (57,039) (87,144) (57,039)
2,347 4,310 2,126 3,985
Total cash and cash equivalents 4,918 6,382 4,692 6,000
1
Mandatory reserve deposits are held with local central banks in accordance with statutory requirements; these deposits are not available to finance the Group’s
day‑to‑day operations.
100
48 Cash flow statements (continued)
e Disposal and closure of group undertakings, joint ventures and associates

The Group The Bank
2011 2010 2011 2010
£m £m £m £m
Derivatives, trading and other financial assets at fair value through profit or loss 134 164 – –
Loans and advances to banks – 3,469 – –
Loans and advances to customers 24 2,774 – –
Debt securities 124 69 – –
Tangible fixed assets 147 1,015 – –
Deposits from banks – (1,563) – –
Customer accounts – (3,397) – –
Other net assets and liabilities (110) 18 141 –
319 2,549 141 –
Profit (loss) on sale of businesses (21) 38 – –
Net cash inflow from disposals 298 2,587 141 –
49 Future accounting developments
The following pronouncements may have a significant effect on the Group’s financial statements but are not applicable for the year ending 31 December 2011 and
have not been applied in preparing these financial statements. Save as disclosed, the full impact of these accounting changes is being assessed by the Group.
Pronouncement Nature of change IASB effective date

Amendments to IFRS 7 Financial Requires an entity to disclose information to enable users of its financial Annual and interim periods
Instruments: Disclosures – statements to evaluate the effect of potential effect of netting arrangements on the beginning on or after 1 January
'Disclosures-Offsetting Financial Assets entity's balance sheet. 2013.
and Financial Liabilities'
IFRS 10 Consolidated Supersedes IAS 27 Consolidated and Separate Financial Statements and SIC-12 Annual periods beginning on or
Financial Statements Consolidation – Special Purpose Entities and establishes principles for the after 1 January 2013.
preparation of consolidated financial statements when an entity controls one or
more entities.
IFRS 12 Disclosure of Interests in Requires an entity to disclose information that enables users of financial Annual periods beginning on or
Other Entities statements to evaluate the nature of, and risks associated with, its interests in after 1 January 2013.
other entities and the effects of those interests on its financial position, financial
performance and cash flows.
IFRS 13 Fair Value Measurement The standard defines fair value, sets out a framework for measuring fair value Annual periods beginning on or
and requires disclosures about fair value measurements. It applies to IFRSs that after 1 January 2013.
require or permit fair value measurements or disclosures about fair value
measurements.
IAS 19 Employee Benefits Prescribes the accounting and disclosure by employers for employee benefits. Annual periods beginning on or
Actuarial gains and losses (remeasurements) in respect of defined benefit after 1 January 2013.
pension schemes can no longer be deferred using the corridor approach and
must be recognised immediately in other comprehensive income.
Amendments to IAS 32 Financial Inserts application guidance to address inconsistencies identified in applying the Annual periods beginning on or
Instruments: Presentation – offsetting criteria used in the standard. Some gross settlement systems may qualify after 1 January 2014.
‘Offsetting Financial Assets and for offsetting where they exhibit certain characteristics akin to net settlement.
Financial Liabilities
IFRS 9 Financial Instruments1 Replaces those parts of IAS 39 Financial Instruments: Recognition and Annual periods beginning on or
Measurement relating to the classification, measurement and derecognition of after 1 January 2015.
financial assets and liabilities. Requires financial assets to be classified into two
measurement categories, fair value and amortised cost, on the basis of the
objectives of the entity’s business model for managing its financial assets and the
contractual cash flow characteristics of the instruments. The available-for-sale
financial asset and held-to-maturity investment categories in IAS 39 will be
eliminated. The requirements for financial liabilities and derecognition are broadly
unchanged from IAS 39.
1 IFRS 9 is the initial stage of the project to replace IAS 39. Future stages are expected to result in amendments to IFRS 9 to deal with changes to the impairment of
financial assets measured at amortised cost and hedge accounting. Until all stages of the replacement project are complete, it is not possible to determine the overall
impact on the financial statements of the replacement of IAS 39.
At the date of this report, these pronouncements are awaiting EU endorsement.
101
50 Approval of financial statements and other information
These financial statements were approved by the directors of Bank of Scotland plc on 23 February 2012.
Bank of Scotland plc and its subsidiaries form a leading UK-based financial services group, whose businesses provide a wide range of banking and financial services
in the UK and in certain locations overseas.
Bank of Scotland plc’s ultimate parent undertaking and controlling party is Lloyds Banking Group plc which is incorporated in Scotland. Copies of the consolidated
annual report and accounts of Lloyds Banking Group plc may be obtained from Lloyds Banking Group’s head office at 25 Gresham Street, London EC2V 7HN or
downloaded via www.lloydsbankinggroup.com.
102
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Bank of Scotland plc

Report and Accounts

Forward looking statements 7

Principal risks and uncertainties 8

Independent auditors’ report 15

Consolidated income statement 17

Statements of comprehensive income 18

Statements of changes in equity 21

Cash flow statements 23

Notes to the accounts 24

Financial risk management objectives and policies

Directors’ conflicts of interest

Policy and practice on payment of creditors

Essential business contracts

Research and development activities

Statement of directors’ responsibilities

Auditors and audit information

On behalf of the Board

Sir Winfried Bischoff Chairman

A Horta-Osório Group Chief Executive

T J W Tookey Group Finance Director (until 24 February 2012)

Sir Julian Horn-Smith (until 17 May 2012)

Lord Leitch (until 29 February 2012)

Forward looking statements

Principal risks and uncertainties

At present the most significant risks faced by the Group are:

LIQUIDITY AND FUNDING

Principal risks and uncertainties

Principal risks and uncertainties

Independent Commission on Banking

New Regulatory Regime

Principal risks and uncertainties

Principal risks and uncertainties

Independent Commission on Banking

Capital and Liquidity

US and European Regulation

Market Risk is reported regularly to appropriate committees.

Principal risks and uncertainties

STATE FUNDING AND STATE AID

Principal risks and uncertainties

Independent auditors’ report

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF BANK OF SCOTLAND PLC

Respective responsibilities of directors and auditors

Scope of the audit of the financial statements

Opinion on financial statements

Opinion on other matter prescribed by the Companies Act 2006

Independent auditors’ report

Matters on which we are required to report by exception

Consolidated income statement

Profit attributable to non-controlling interests – 10

The accompanying notes are an integral part of the financial statements.

Statements of comprehensive income

Total comprehensive income attributable to non-controlling interests – 10

The Group The Bank

The Group The Bank

The directors approved the consolidated financial statements on 23 February 2012.

Sir Winfried Bischoff António Horta-Osório Tim J W Tookey

Statements of changes in equity

––Fixtures and furnishings: 10-20 years