Half Yearly Report (Part 3)

HIGHER RISK LOANS AND OTHER SEGMENTS OF PARTICULAR INTEREST

There are some mortgage types of particular interest or which present higher risks than others. These mortgages consist of:

The arrears performance of these mortgages has continued to be relatively stable during the first half of 2014 with arrears and loss rates remaining low.

Borrower profile (1)

(1) Where a loan exhibits more than one of the criteria, it is included in all the applicable categories.

(2) Mortgage balance includes both the interest-only element of £10,686m (2013: £9,564m) and the non-interest only element of the loan.

(3) Legacy Alliance & Leicester flexible loan products with more limited flexibility than the current Santander UK flexi loan product.

30 June 2014 compared to 31 December 2013 (unreviewed)

The proportion of new business in the first half of 2014 that was pure interest-only remained stable at 12% (2013: 12%). Lending with a mixture of interest-only and capital and interest repayment increased from 10% to 11%, continuing the trend from 2013 as the maximum allowable LTV for this type of lending was increased to 75% towards the end of 2012 whilst maintaining the maximum allowable LTV for the interest-only element of the mortgage at 50%.

The proportion of flexible loans new business decreased to 3% (2013: 7%), whilst Buy-to-let lending in the first half of 2014 increased slightly to 3.6% (2013: 2.5%) in line with the strategy to expand this line of business in a controlled manner.

From a mortgage asset stock perspective, loans with a current LTV greater than 100% decreased to 3% (2013: 4%) driven by improving house prices.

Credit performance 

(1) Where a loan exhibits more than one segment of particular interest, it is included in all applicable categories. As a result, the sum of the mortgage arrears in the segments of particular interest will not agree to the total mortgage arrears.

(2) Interest-only loan segment contains both full interest-only and part-interest-only loans.

(3) Includes legacy Alliance & Leicester flexible loan products with more limited flexibility than the current Santander UK flexi loan product.

(4) Includes other loans that are not in any segment of particular interest.

30 June 2014 compared to 31 December 2013 (unreviewed)

At 30 June 2014, the NPL ratio decreased from 1.88% to 1.79% due to a reduction in NPL stock. Interest-only and loans with a current LTV over 100% have a higher than average NPL ratio. The decrease in the NPL ratio for interest-only loans in the first half of 2014 was in line with the overall reduction in NPL stock. The NPL ratio for loans with an LTV > 100% increased slightly in the first half of 2014 due to a reduction in stock in this segment driven by the house prices increases. The buy-to-let portfolio remained better than average quality, as did the flexible loans portfolio.

A flexible mortgage loan permits customers to "drawdown" additional funds at any time up to a predefined credit limit. By utilising the drawdown on their available funds customers are able to vary their monthly payments, or take payment holidays. A customer's ability to drawdown is subject to certain predetermined conditions, as described on page 80 of the 2013 Annual Report. Customer limits are actively managed where information collected suggests the predefined limit requires adjustment.

During the first half of 2014, the stock of properties in possession increased slightly, although the underlying trend of possession stock is improving due to favourable market conditions.

Forbearance(1) (2) (3) (4)

The incidence of the main types of higher risk loans forbearance arrangements which commenced during the six months ended 30 June 2014 and year ended 31 December 2013 was:

(1) Mortgages are included within the period/year that they were forborne.

(2) The figures by year period/reflect the amount of forbearance activity undertaken during the period/year irrespective of whether any forbearance activity has previously been undertaken on the forborne accounts.

(3) Where a loan exhibits more than one of the higher risk criteria, it is included in all the applicable categories.

(4) Loans which are either full interest only or partial interest only are included.

(5) Portfolio of total forbearance arrangements which commenced during the period/year.

30 June 2014 compared to 31 December 2013 (unreviewed)

The values of higher risk loan entering forbearance arrangements in the first half of 2014 compared to 2013 decreased in line with overall reductions seen in flows into forbearance during the period.

During the first half of 2014, the proportion of loans entering forbearance arrangements defined as higher risk from interest-only loans increased, and from flexible loans decreased. The mix of forbearance arrangements shifted slightly due to factors such as the increased level of capitalisations described on page 50. This led to a slightly higher proportion of forbearance arrangements being granted to interest-only loans in the first half of 2014 compared to 2013.

BANKING AND CONSUMER CREDIT

Santander UK may also provide borrowing facilities by way of overdraft as part of bank accounts, together with unsecured personal loans, credit cards, consumer finance, including finance leases and other forms of consumer finance, and business banking lending.

LENDING

An analysis of movements in banking and consumer credit loans and advances is presented below.

30 June 2014 compared to 31 December 2013 (unreviewed)

Total net lending increased by £425m (5.6%) in the first half of 2014, largely in line with our loyalty strategy, due to increases in unsecured personal loans and credit cards, driven by competitively priced products in unsecured personal loans and strong balance transfer and purchase promotion products in credit cards.

CREDIT PERFORMANCE

(1) Banking and consumer credit lending is classified as non-performing when the customer fails to make a payment when contractually due for three months or longer, or where it is deemed probable that this will occur in the near future or for accounts where fees and interest have been suspended.

(2) NPL ratio is the NPL stock as a % of total loans and advances.

(3) The coverage ratio is the total impairment loss allowances, as a % of NPL stock. Total loan loss allowances relate to early arrears and performing assets as well as accounts classified as NPL and hence the ratio exceeds 100%.

30 June 2014 compared to 31 December 2013 (unreviewed)

During the first half of 2014, the value of NPLs decreased by 17% to £123m (2013: £148m) and the NPL ratio decreased by 41 basis points to 1.55% (2013: 1.96%). The main drivers of these improvements were bank accounts, reflecting the higher credit quality of 1|2|3 Current Account customers and unsecured personal loans that continued to benefit from the sustained improvement in the credit quality of new business. This was driven by the competitive pricing in unsecured personal loans and strong balance transfer and purchase promotion products in credit cards being attractive to customers of high credit worthiness.

CREDIT RISK - COMMERCIAL BANKING

In Commercial Banking, credit risk arises on asset balances and on committed off-balance sheet transactions such as credit facilities or guarantees. Consequently, committed exposures are typically higher than asset balances. However, in the following committed exposures tables, Sovereigns are presented net of short positions and include Sovereign exposures established for liquidity management purposes managed by Short Term Markets on behalf of Corporate Centre. Large Corporate reverse repos are presented net of repo liabilities and include OTC derivatives. As a result, the committed exposures are smaller than the asset balances recognised on the balance sheet.

COMMERCIAL BANKING - COMMITTED EXPOSURES

Rating distribution

The rating distribution tables show the credit risk exposure by Santander UK's internal rating scale (see 'Credit Quality' on page 39) for each portfolio within Commercial Banking. Within this scale, the higher the rating, the better the quality of the counterparty.

(1) Represents smaller exposures predominantly within the commercial mortgages portfolio which are subject to scorecards rather than a rating model.

(2) An international organisation, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the geographical focus of the organisation.

Geographical distribution

The geographic location is classified by country of risk, being the country where each counterparty's main business activity or assets are located. For clients whose operations are more geographically dispersed, the country of incorporation is applied.

(1) An international organisation, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the geographical focus of the organisation.

30 June 2014 compared to 31 December 2013 (unreviewed)

During the first half of 2014, total committed exposures increased by £3.5bn or 8% to £46.6bn principally within the Large Corporate, and Mid Corporate and SME portfolios.

Large Corporate exposures increased by 14% as a result of the development of the franchise focused in high-rated multinational companies. Growth was focused on the UK and other European countries with counterparties with good credit quality and primarily reflects the provision of financial products to support the working capital and liquidity needs of our clients.

The Mid Corporate and SME portfolio grew by 12%, reflecting the continued development of the franchise especially in the SME segment. This was reflected in the rise in the mid-range rating bands as this is where counterparties in this segment typically rate.

COMMERCIAL BANKING - CREDIT RISK MITIGATION 

At 30 June 2014, collateral held against impaired loans amounted to 39% (2013: 47%) of the carrying amount of impaired loan balances.

COMMERCIAL BANKING - CREDIT PERFORMANCE 

Exposures exhibiting potentially higher risk characteristics are subject to risk monitoring under the Watchlist process (described in "The Credit Cycle" section under "Risk monitoring" on page 76 of the 2013 Annual Report). The table below sets out the portfolio showing exposures subject to risk monitoring under the Watchlist process and those classified as non-performing by portfolio at 30 June 2014 and 31 December 2013:

(1) Includes committed facilities and derivatives. The terms 'Enhanced Monitoring' and 'Proactive Management' are defined on page 76 of the 2013 Annual Report.

(2) Non-Performing Exposure in the table above include committed facilities and derivative exposures and therefore are larger than the NPLs in the table below which only include drawn balances. All the Non-Performing Exposures are impaired for purposes of provisioning.

(3) Corporate loans are assessed individually or collectively assessed for impairment. Assets reported as impaired represent, for collective assessment, that portion of the loan portfolio where it is estimated that a loss has been incurred, plus those assets individually impaired.

(4) Excludes IBNO provision.

(5) Allowance for incurred inherent losses (i.e. incurred but not observed ('IBNO')) as described in Note 1 to the Consolidated Financial Statements in the 2013 Annual Report.

(6) There is no impairment allowance attributable to Sovereign and Supranational, and to Large Corporate.

(7) An international organisation, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the geographical focus of the organisation.

Non-performing loans and advances (1) (2)

An analysis of Commercial Banking NPLs is presented below.

(1) Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or where it is deemed probable that this will occur in the near future.

(2) Commercial Banking loans and advances to customers include finance leases.

(3) All Commercial Banking balances are UK and continue accruing interest. For the data presented, the balances include interest charged to the customer's account, but exclude interest accrued but not yet charged to the account.

(4) All the Non-Performing Loans are impaired for purposes of provisioning.

(5) NPLs against which an impairment loss allowance has been established.

(6) Commercial Banking loans and advances to customers in arrears as a percentage of Commercial Banking loans and advances to customers.

(7) Commercial Banking NPLs as a percentage of Commercial Banking loans and advances to customers.

(8) Impairment loss allowances as a percentage of NPLs.

Movements in NPLs during the first six months are set out in the graph below. 'Entries' represent loans which have become classified as NPLs during the period. 'Exits (including repayments)' represent that element of loans to customers that have been repaid (in full or in part) plus those returned to performing status. 'Write-offs' represent the unrecovered element of a loan where recovery options, including realisation of any collateral, have been exhausted. Forbearance activity does not result in a change in the NPL status.

The following is a pictorial representation of the reviewed data in the table below.

http://www.rns-pdf.londonstockexchange.com/rns/0920P_-2014-8-14.pdf

An analysis of the NPL movements during the first half of 2014 is presented below.

30 June 2014 compared to 31 December 2013 (unreviewed)

During the first six months of 2014, Watchlist exposures subject to proactive management reduced overall to £749m (2013: £777m), largely driven by a reduction in Commercial Real Estate which more than compensated for the increase in the Mid Corporate and SME portfolio. Watchlist exposures subject to enhanced monitoring increased in almost all portfolios, predominantly due to a tightening of policy whereby any customer with a Care Quality Commission flag is automatically added to the Watchlist; and due to the prudent policy requirement to add Commercial Real Estate transactions that have six months to maturity and no definitive exit or refinance plan in place, irrespective of their loan-to-value ratio. In the Sovereign and Supranational, Large Corporate and Social Housing portfolios, there were no exposures subject to proactive management with only 2.4% (2013: 1.4%) of these portfolio exposures subject to enhanced monitoring.

Loans and advances to customers in arrears increased to £733m (2013: £680m) largely due to a single long-standing loan of £89m which moved to non-performance. A successful restructure of this loan is still anticipated and a conservative provision is held against it. Consequently, loans and advances to customers in arrears as a percentage of loans and advances to customers increased to 3.17% (2013: 3.08%).

During the first six months of 2014, the NPL ratio also increased slightly to 3.15% (2013: 3.02%) due to the same single long-standing loan noted above. The underlying NPL ratio excluding this case reduced to 2.76%.

In the first half of 2014, interest income recognised on impaired loans amounted to £9m (six months ended 30 June 2013: £7m).

COMMERCIAL BANKING LOANS - FORBEARANCE

Forbearance commenced during the period/year (1)

No arrangements have been entered into with respect to Sovereign and Supranational, Large Corporate, Structured Finance or Social Housing counterparties. The exposures that entered forbearance during the six months period ended 30 June 2014 and the year ended 31 December 2013 were:

(1) The figures by period/year reflect the amount of forbearance activity undertaken during the period/year irrespective of whether any forbearance activity has previously been undertaken on the forborne accounts.

Forbearance cumulative position

a) Performance status when entering forbearance

The status of forborne exposures at 30 June 2014 and 31 December 2013 when they originally entered forbearance, analysed by their payment status, was:

b) Performance status at the period/year-end

The current status of forborne exposuresanalysed by their payment status at 30 June 2014 and 31 December 2013 was:

This data may be further analysed by portfolio, as follows:

Mid Corporate and SMEs

Commercial Real Estate

30 June 2014 compared to 31 December 2013 (unreviewed)

The incidence of forbearance that commenced in the period remained stable compared to 2013. Existing cases continue to work their way through the process. Overall, the cumulative forbearance position decreased both in the Commercial Real Estate and Mid Corporate and SME portfolios.

Accounts that are in forbearance continue to be closely monitored, to ensure that the forbearance arrangements are sustainable. Not all forbearance will prove effective, and in certain circumstances, market conditions may lead either to a case remaining in NPL even post-forbearance or to the need for a second forbearance action. At 30 June 2014, 34% (2013: 36%) of forborne exposures that were in NPL at the time of forbearance were performing in accordance with the revised terms agreed under the forbearance arrangements. At 30 June 2014, 54% (2013: 63%) of total forborne exposure was performing in accordance with the revised terms agreed under the forbearance arrangements. This decrease is largely due to the aforementioned single long-standing loan which moved to non-performance. A successful restructure of this loan is still anticipated.

The level of compliance with revised terms agreed under forbearance arrangements is influenced by market conditions and, as a consequence of the economic conditions, it is taking longer for cases to return to performing status after forbearance. Those cases where forbearance occurs prior to default, which at 30 June 2014 represented 81% (2013: 79%) of exposure, are generally more effective as highlighted in the tables above. Forborne exposures are assessed for observed impairment loss allowances. The greater probability of a loss when compared to the performing book is reflected in the calculation of impairment loss allowances. A customer's ability to adhere to any revised terms agreed is an indicator of the sustainability of Santander UK's forbearance arrangements, although the forbearance is unlikely to be successful in all cases.

Debt-for-equity swaps (unreviewed)

Debt-for-equity swaps amounted to £28m at 30 June 2014 (2013: £46m) and in view of their small size are not included in these analyses.

Financial assets that would otherwise be past due or impaired

At 30 June 2014, the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been forborne was £55m (2013: £70m).

HIGHER RISK LOANS AND OTHER SEGMENTS OF PARTICULAR INTEREST 

The Commercial Real Estate market has experienced a particularly challenging environment over recent years following the financial crisis. Within this sector, Commercial Real Estate loans originated prior to 2009 represent a segment of relatively higher risk.

Credit performance

Commercial Real Estate non-performing exposures and weighted average LTVs at 30 June 2014 and 31 December 2013 may be further analysed between loans originated pre-2009 and thereafter as follows:

30 June 2014 compared to 31 December 2013 (unreviewed)

At 30 June 2014, 88% (2013: 92%) of the non-performing exposures related to deals originated pre-2009. The pre-2009 vintage loans were written on terms prevailing in the market at that time which, compared to more recent times, included higher original LTVs, lower interest coverage and exposure to development or letting risk. Following the significant downturn in the commercial real estate market in 2008 and 2009, some of these customers suffered financial stresses resulting in their inability to meet the contractual payment terms, comply with covenants, or achieve refinancing/repayment at maturity. As a result, the pre-2009 sub-portfolio has experienced higher NPL rates in recent years. At 30 June 2014, the NPL ratio of the pre-2009 sub-portfolio was 22.6% which increased from 31 December 2013 due to the reduction in the size of the portfolio.

In light of the market deterioration, Santander UK's lending criteria were significantly tightened from 2009 onwards, with lower LTVs and the avoidance of transactions with material letting or development risks (at 30 June 2014, this element of the portfolio represented only 2% (2013: 4%) of the total Commercial Real Estate portfolio). As a result, the sub-portfolio representing loans originating from 2009 onwards continues to perform significantly better than the pre-2009 sub-portfolio which continues to decline both in absolute terms and as a proportion of the total Commercial Real Estate portfolio. At 30 June 2014, the pre-2009 sub-portfolio represented less than 13% (2013: 16%) of the total Commercial Real Estate portfolio.

Further detail on the entire Commercial Real Estate portfolio is contained in the following section.

Commercial Real Estate loans

The Commercial Real Estate portfolio remained well diversified by sector at 30 June 2014 and 31 December 2013, as set out below.

Loan-to-value analysis

In Commercial Real Estate lending, the main form of credit mitigation is collateral. The table below analyses the loan to value ratios of loans within the Commercial Real Estate portfolio at 30 June 2014 and 31 December 2013. The LTV distribution is presented for the Non-Standardised portfolio, which at £8.7bn (2013: £8.4bn) represented 84% (2013: 84%) of the total Commercial Real Estate portfolio at 30 June 2014. The residual element of the portfolio consists of smaller value transactions largely in the form of commercial mortgages for which valuations are only available at the point of origination. These loans have therefore been excluded from the analysis below.

30 June 2014 compared to 31 December 2013 (unreviewed)

At 30 June 2014, the profile of the portfolio remained conservative in terms of LTV with 69% (2013: 69%) of the portfolio at or below 60% LTV. This reflected the more recent vintage of the portfolio with 87% (2013: 84%) originated in 2009 or subsequent years. The majority of higher LTV deals represent older deals which remain in the portfolio.

New business is rarely written above 65% LTV. During the first half of 2014, all new business was originated at 65% LTV or lower. The majority of the cases with negative equity form part of the forborne element of the portfolio and are managed by the Restructuring & Recoveries team.

At 30 June 2014 the average LTV, weighted by exposure, remained stable at 56% (2013: 56%). The weighted average LTV of new deals written in the first half of 2014 was 54% (2013: 54%).

Refinancing risk

As part of the annual review process, for commercial real estate loans that are approaching maturity, consideration is given to the prospects of refinancing the loan at prevailing market terms and applicable credit policy. The review will consider this and other aspects (e.g. covenant compliance) which could result in the case being placed on the Watchlist. Additionally, where an acceptable refinancing proposal has not been received within six months prior to maturity, the case will be placed on the Watchlist.

At 30 June 2014, there was £1,535m (2013: £852m) of commercial real estate loans due to mature within 12 months. Of these, £257m i.e. 17% (2013: £320m i.e. 27%) have an LTV ratio above that which would be considered acceptable under current credit policy, of which £252m (2013: £313m) has been placed on the Watchlist or recorded as NPL and has an impairment loss allowance of £58m (2013: £62m) associated with it.

CREDIT RISK - MARKETS

Derivative risk exposures in the tables below are lower than the balance sheet position because the overall risk exposure is monitored and therefore consideration is taken of margin posted, Credit Support Annexes within ISDA Master Agreements, and master netting agreements and other financial instruments which reduce the Santander UK group's exposures. Derivative asset balances recognised on the balance sheet reflect only the more restrictive netting permitted by IAS 32.

Markets - committed exposures

Rating and geographical distribution

The tables below reflect the total credit risk exposures of Markets by internal rating scale (see 'Credit Quality' on page 39) and by geographical areas. The exposures include committed facilities as well as the uncommitted drawn facilities. The geographic location is defined as the counterparty's country of domicile except where a full risk transfer guarantee is in place, in which case the country of domicile of the guarantor is used.

30 June 2014 compared to 31 December 2013 (unreviewed)

As a continued effort to mitigate counterparty credit risk in derivative transactions, Santander UK increased the use of Central Counterparties ('CCPs') during the first half of 2014. This was reflected by the increased exposure in rating categories 8 and 9 in the UK resulting in an overall improved credit rating profile.

MARKETS - CREDIT Risk Mitigation

Markets focuses on derivative products and mitigates its credit risk to counterparties through netting arrangements, collateralisation and the use of CCPs. For details of the approach to credit risk mitigation, see "Credit Risk Management - Markets" on page 85 of the 2013 Annual Report.

The top 20 clients with which Santander UK had the biggest derivative exposures were Banks and CCPs. These top 20 clients' derivative exposure accounted for 78% of the total derivative exposure in Markets at 30 June 2014 (2013: 90%). Cash collateral related to the Top 20 at 30 June 2014 was £1.7bn (2013: £2.3bn) and the risk exposure weighted average credit rating was 7.4 (2013: 7.6).

The total notional amount of Santander UK's OTC derivatives at 30 June 2014 was £934.2bn (2013: £909.4bn) and 46% (2013: 34%) was cleared through CCPs. By mark-to-market terms (i.e. the credit risk exposure including mark-to-market value plus a volatility add-on that reflects the future volatility of the derivatives), CCPs were used in connection with 26% (2013: 18%) of Santander UK's OTC derivatives. CCP transaction values as a percentage of the total portfolio are higher in notional amount than in mark-to-market terms due to their higher collateralisation and lower volatility.

Markets - CREDIT PERFORMANCE

At 30 June 2014, there were no impaired or non-performing loans or exposures (2013: none) and the assets in the Watchlist proactive management category amounted to only £69m (2013: £36m).

Markets - Forbearance

At 30 June 2014 and 31 December 2013, there was no forbearance activity in Markets.

CREDIT RISK - CORPORATE CENTRE 

Credit risk arises on assets in the balance sheet and in off-balance sheet transactions. Consequently, the committed exposure (which takes into account credit mitigation procedures) is shown in the tables below. It excludes Sovereign and Supranational exposures managed by Short Term Markets within Commercial Banking.

Corporate Centre - COMMITTED exposureS

Rating distribution

The rating distribution tables below show the credit risk exposure by Santander UK's internal rating scale (see 'Credit Quality' on page 39) for each portfolio. Within this scale the higher the rating the better the quality of the counterparty.

(1) Represents smaller exposure predominantly within the commercial mortgages portfolio which are subject to scorecards rather than a rating model.

(2) An international organisation whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the geographical focus of the organisation.

Geographical distribution

The geographic location is classified by country of risk being the country where each counterparty's main business activity or assets are located. For clients whose operations are more geographically dispersed the country of incorporation is applied.

(1) An international organisation whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the geographical focus of the organisation.

30 June 2014 compared to 31 December 2013 (unreviewed)

During the first half of 2014, total committed exposures increased by £1.6bn or 3% to £47.5bn principally within the Sovereign and Supranational, and Structured Products portfolios, partially offset by decreases in the Derivatives and Legacy Portfolios in run-off portfolios. Committed exposures to Sovereign and Supranationals principally reflect cash at central banks and holdings of highly rated liquid assets as part of normal liquid asset portfolio management, and remained concentrated in the UK and US. Exposures to Structured Products reflect holdings of highly rated covered bonds, floating rate notes and residential mortgage-backed securities as part of normal liquid asset portfolio management. The increased exposures reflect the purchase of covered bonds and floating rate notes to optimise the liquid asset portfolio composition. Derivative exposures decreased due to a managed reduction of the portfolio. Legacy Portfolios in run-off decreased as we continued to successfully implement our on-going exit strategy.

CORPORATE CENTRE - CREDIT RISK MITIGATION

At 30 June 2014, collateral held against impaired loans amounted to 74% (2013: 65%) of the carrying amount of impaired loan balances. Structured Products are unsecured but benefit from senior positions in the creditor cascade. Credit risk in derivatives is mitigated by netting agreements, collateralisation and the use of CCPs. For details of the approach to credit risk mitigation, see "Credit Risk Management - Markets" on page 85 of the 2013 Annual Report.

Corporate centre - CREDIT PERFORMANCE

Exposures exhibiting potentially higher risk characteristics are subject to risk monitoring under the Watchlist process (described in "The Credit Cycle" section under "Risk monitoring" on page 76 of the 2013 Annual Report). The table below sets out the portfolio showing exposures subject to risk monitoring under the Watchlist process and those classified as non-performing by portfolio at 30 June 2014 and 31 December 2013:

(1) Includes committed facilities and derivatives. The terms 'Enhanced Monitoring' and 'Proactive Management' are defined on page 76 of the 2013 Annual Report.

(2) Non-Performing Exposure in the table above include committed facilities and derivative exposures and therefore are larger than the NPLs in the tables on page 64 which only include drawn balances. All the Non-Performing Exposures are impaired for purposes of provisioning.

(3) Corporate loans are assessed individually or collectively assessed for impairment. Assets reported as impaired represent, for collective assessment, that portion of the loan portfolio where it is estimated that a loss has been incurred, plus those assets individually impaired.

(4) Excludes IBNO provision.

(5) Allowance for incurred inherent losses (i.e. incurred but not observed ('IBNO')) as described in Note 1 to the Consolidated Financial Statements in the 2013 Annual Report.

(6) There is no impairment allowance attributable to Sovereign and Supranational or Structured Products.

(7) An international organisation, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the geographical focus of the organisation.

Non-core customer assets at 30 June 2014 comprised Social Housing of £7.0bn (2013: £7.1bn), Commercial Mortgages of £1.0bn (2013: £1.2bn), Aviation of £0.2bn (2013: £0.4bn), Shipping of £0.3bn (2013: £0.4bn), and Others of £0.2bn (2013: £0.3bn).

Non-performing loans and advances (1) (2)

An analysis of Corporate Centre NPLs is presented below.

(1) Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or where it is deemed probable that this will occur in the near future.

(2) Corporate Centre loans and advances to customers include Social Housing loans and finance leases.

(3) All Corporate Centre balances are UK and continue accruing interest. For the data presented, the balances include interest charged to the customer's account, but exclude interest accrued but not yet charged to the account.

(4) All the Non-Performing Loans are impaired for purposes of provisioning.

(5) NPLs against which an impairment loss allowance has been established.

(6) Corporate Centre loans and advances to customers in arrears as a percentage of Corporate Centre loans and advances to customers.

(7) Corporate Centre NPLs as a percentage of Corporate Centre loans and advances to customers.

(8) Impairment loss allowances as a percentage of NPLs.

Movements in NPLs during the first six months are set out in the graph below. 'Entries' represent loans which have become classified as NPLs during the first six months. 'Exits (including repayments)' represent that element of loans that have been repaid (in full or in part) plus those returned to performing status. 'Write-offs' represent the unrecovered element of a loan where recovery options, including realisation of any collateral, have been exhausted. Forbearance activity does not result in a change in the NPL status.

The following is a pictorial representation of the reviewed data in the table below.

http://www.rns-pdf.londonstockexchange.com/rns/0920P_1-2014-8-14.pdf

An analysis of the NPL movements during the first half of 2014 is presented below.

30 June 2014 compared to 31 December 2013 (unreviewed)

During the first half of 2014, the value of exposures in the Legacy Portfolios in run-off subject to Watchlist and NPLs decreased as a consequence of the strategy to exit these exposures. Similarly, the level of provision decreased during the period reflecting disposal of assets. Social Housing exposure subject to enhanced monitoring decreased as a result of a number of cases returning to performing status following resolution of governance issues as anticipated. There was no Watchlist exposure subject to enhanced monitoring in Sovereign and Supranational, Structured Products and Derivatives.

In the first six months of 2014, loans and advances to customers in arrears decreased to £198m (2013: £239m) as Santander UK continued to execute the strategy of exiting problem exposures through sale of the debt or through the realisation of the collateral. Loans and advances to customers in arrears as a percentage of loans and advances to customers decreased to 2.27% (2013: 2.55%) as a result of the decrease in arrears described above which was achieved at a slightly faster rate than the run-off of the loans and advances.

At 30 June 2014, the NPL ratio decreased slightly to 2.10% (2013: 2.36%). This decrease reflected the continuing strategy to exit exposures where possible for this portfolio. In the first half of 2014, coverage increased to 132% (2013: 125%) reflecting the successful disposal programme without incurring significant further losses.

In the first six months of 2014, interest income recognised on impaired loans amounted to £4m (six months ended 30 June 2013: £7m).

CORporate centre - Forbearance

Forbearance arrangements have only been entered into with respect to the Legacy portfolios in run-off. No forbearance arrangements have been entered into with respect to Sovereign and Supranational, Structured Products, Derivatives or Social Housing counterparties.

Forbearance commenced during the period

The forborne exposures that entered forbearance during the six months ended 30 June 2014 and the year ended 31 December 2013 were:

Forbearance cumulative position

a) Performance status when entering forbearance

The status of the forborne exposures at 30 June 2014 and 31 December 2013 when they originally entered forbearance, analysed by their payment status, was:

b) Performance status at the period/year-end

The current status of forborne exposures analysed by their payment status at 30 June 2014 and 31 December 2013 was: