bank-r-and-a
bank-r-and-a
bank-r-and-a
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Overview Strategic report Corporate governance Risk management Financial statements Other information<br />
Notes to the Company financial statements continued<br />
For the year ended 31 December 2013<br />
All amounts are stated in £m unless otherwise indicated<br />
27. Fair values of financial assets <strong>and</strong> liabilities continued<br />
Equity shares<br />
Equity shares primarily relate to investments held in Vocalink Limited which are unquoted shares. The valuation of these shares is based on the Company’s<br />
percentage shareholding <strong>and</strong> the net asset value of the Company according to its most recently published financial statements.<br />
Amounts owed to Co-operative Bank undertakings<br />
Amounts owed to Co-operative Bank undertakings are to the Silk Road Finance Number One plc (Silk Rd 1) subsidiary, relating to the legal transfer of loans <strong>and</strong><br />
advances on securitisation. The amounts are fair valued to eliminate an accounting mismatch of the swap derivative discussed below.<br />
Revaluation of the £1,466.4m (2012: £1,764.4m) mortgage pool from carrying to fair value is based on assumed timing of future mortgage capital <strong>and</strong> revenue<br />
receipts, discounted to present value using a credit adjusted discount rate.<br />
The amortisation profile is based on a redemption profile, assuming some annual prepayment, which is extended to the earlier of the mortgage maturity date<br />
or the step-up date, the earliest contractual maturity of the debt securities in issue when the balance outst<strong>and</strong>ing on the notes may be repaid, this falls on<br />
21 March 2015. Similarly, the revenue receipts are calculated based on the redemption profile, but extended until the earlier of the mortgage maturity date or<br />
the step-up date. For fixed rate mortgages, revenue receipts are based on fixed customer rates within the assumed amortisation profile. For tracker, SVR <strong>and</strong><br />
discount products, revenue receipts are assumed to be based on forward Bank of Engl<strong>and</strong> base rates plus the product margins. Fixed <strong>and</strong> tracker mortgages<br />
are assumed to revert to SVR at the end of any offer period. All mortgages in the mortgage pool were originated pre 31 December 2007.<br />
Derivative financial instruments<br />
Derivative financial instruments in the form of interest rate swaps have been entered into between the Bank <strong>and</strong> its subsidiaries, <strong>and</strong> external counterparties.<br />
The purpose of the swaps is to convert the fixed <strong>and</strong> base rate linked revenue receipts of the pool of mortgage assets to the same LIBOR linked basis as the<br />
intercompany loan. Under this swap arrangement the Bank’s subsidiaries pay to the swap counterparty, the monthly mortgage revenue receipts of the pool<br />
of assets <strong>and</strong> receives from the swap counterparty LIBOR plus a contractual spread on the same notional balance; the spread being sufficient to cover the<br />
intercompany loan <strong>and</strong> any expenses. The Bank has a ‘back to back’ swap that is the mirror image of the subsidiaries’ swaps.<br />
The swaps are valued based on an assumed amortisation profile of the pool of assets to the bond maturity date (assuming some annual prepayment), an<br />
assumed profile of customer receipts over this period, <strong>and</strong> LIBOR prediction using forward rates. Swap cash flows are discounted to present value using<br />
mid-yield curve zero coupon rates, ie no adjustment is made for credit losses, nor for transaction or any other costs.<br />
In addition derivative liabilities include a credit default swap. The credit default swap balance has arisen, as on 28 January 2013, the Company entered into a<br />
transaction to transfer a mezzanine portion of the risk in a portfolio of residential mortgage loans to third party investors, via a special purpose vehicle, Calico<br />
Finance Number One Limited. The valuation takes on market MBS spreads, less the original traded spread multiplied by the notional, <strong>and</strong> the duration, then<br />
discounted. These spreads include the probability of default.<br />
Investment properties<br />
Investment properties are carried at fair value. Fair value is calculated by using recent valuations of individual assets within the portfolio, index linked to the<br />
balance sheet date using the relevant regional house price index, where appropriate.<br />
The Co-operative Bank plc Annual report <strong>and</strong> accounts 2013<br />
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