Presentation of Information

Transcription

1

2 CONTENTS Executive Chairman s Statement 1 The Board 3 Corporate Governance 4 Directors Remuneration Report 8 Corporate Social Responsibility Report 12 Operating and Financial Review 14 Directors Report 19 Independent Auditors Report to the Shareholder of Northern Rock plc 22 Consolidated Income Statement 23 Consolidated Statement of Comprehensive Income 24 Consolidated Balance Sheet 25 Company Balance Sheet 26 Consolidated Statement of Changes in Equity 27 Company Statement of Changes in Equity 28 Consolidated Cash Flow Statement 29 Company Cash Flow Statement 30 Notes to the Accounts 31 Presentation of Information On 17 February 2008, the Chancellor of the Exchequer announced that the Government had decided to take Northern Rock into a period of temporary public ownership and on 22 February 2008 the Banking (Special Provisions) Bill received Royal Assent. HM Treasury made an order on 22 February 2008 which transferred all of the Ordinary, Preference and Foundation Shares in Northern Rock to the Treasury Solicitor as the Treasury s nominee. The legislation includes provisions such that Change of Control provisions in any of the Company s contractual arrangements have not been triggered. Details of the impact of temporary public ownership are given throughout this Annual Report and Accounts as it affects the Company s operations and financial disclosures. As Northern Rock has previously published financial statements which have been prepared in accordance with EU endorsed International Financial Reporting Standards ( IFRS ), IFRIC interpretations and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS, it continues to do so.

3 EXECUTIVE CHAIRMAN S STATEMENT Northern Rock plc (the Company ) commenced trading on 1 January following completion of the legal and capital restructuring of the former Northern Rock business, which created two separate entities: Northern Rock plc, a new retail bank authorised by the FSA, and Northern Rock (Asset Management) plc (NRAM), now one of the companies under the control of UK Asset Resolution Limited Northern Rock plc is authorised and regulated by the Financial Services Authority (FSA) as a mortgage provider and deposit taker. The Company remains in Government ownership, but the intention remains to return it to the private sector when conditions are right to do so. FINANCIAL AND OPERATIONAL PERFORMANCE represented Northern Rock plc s first year of trading. The Company has made good progress in its first year and its financial performance is in line with expectations for the twelve months to 31 December. Reflecting the low interest rate environment, along with significant non recurring costs, a loss of million was reported for the year, with a loss of 80.9 million in the second half compared with a loss of million in the first half of the year. The loss incurred reflects the difficult trading environment for a small bank, dependent upon retail funding, which continued throughout. This included the prevailing low interest rate and subdued mortgage market. The Company also incurred significant costs relating to the Government s retail and wholesale guarantees, which have now been removed, and the high level of liquidity held. Significant non recurring costs were also incurred as the Company was separated from NRAM. However, the loss in the second half of the year was 61.7 million less than in the first half demonstrating that progress is being made. The Company continued to support capacity in the UK mortgage market, with gross mortgage lending (including retention business) during the year of 4.2 billion. Net residential lending of 1.9 billion in increased balances to 12.2 billion at 31 December. The quality of new lending remained high, with an average loan to value (LTV) ratio of new lending at 62% compared with the average for the book of 59%. Careful underwriting processes and affordability for customers are key considerations in our mortgage lending. Northern Rock plc is predominantly funded by retail deposits. Retail balances were 16.7 billion at 31 December, compared with 17.6 billion at 30 June and remained within the cap imposed under EC State Aid rules. The reduction in retail deposit balances over the year is as expected and reflects active management of the retail savings book, such as the commercial decision to close the Guernsey savings operation, as well as the release of the Government s savings guarantee. The Government s guarantee of retail deposits was lifted on 24 May for variable rate accounts, reflecting the Company s strong capital and liquidity position. Fixed rate accounts opened before 24 February keep the guarantee for the life of the product. Northern Rock plc remains a member of the UK Financial Services Compensation Scheme (FSCS), which provides protection of up to 85,000 per person for eligible depositors. Guarantees on certain wholesale deposits of Northern Rock plc were lifted on 2 November. Fixed term wholesale deposits existing on 1 January will retain the guarantee to maturity. The Company is strongly capitalised, with both a Tier 1 and Total Capital ratio of 31.6%, and holds a high level of liquidity to support the retail deposit book and new lending activity. During the year the workforce was reduced to align the number of staff with the smaller size of the Company and a lower level of new business activity. As a result of this, approximately 650 jobs were made redundant. In addition, as part of the separation of Northern Rock plc from Northern Rock (Asset Management) plc, approximately 1,250 staff were transferred to Bradford & Bingley plc. GOVERNANCE The Board contains strong banking and operational expertise which are considered essential to oversee the activities of Northern Rock plc and its ultimate return to the private sector. Following the departure of Gary Hoffman as Chief Executive, who stepped down from the Board on 4 November, I reverted from Non Executive to Executive Chairman. I was previously appointed to this role by the Government, in February 2008, when the former business entered public ownership. The Board and UKFI considered that this would provide continuity of leadership and management required at this time. Rick Hunkin, Chief Risk Officer (CRO), stepped down from the Board and left the Company on 31 December. Keiran Foad has been appointed as the new CRO and joined the Company on 1 March The Board has five Non Executive Directors; Laurie Adams, Richard Coates, Mike Fairey, Mark Pain and Mary Phibbs. Jim McConville, Chief Financial Officer, also sits on the Board as an Executive Director of the Company. REMUNERATION Northern Rock plc needs to attract and retain colleagues with the appropriate skills and experience to drive company performance and deliver value for taxpayers. Therefore it is essential that an appropriate remuneration framework is in place. For performance, the Remuneration Committee have agreed a bonus scheme for all colleagues, including senior management, with the approval of UKFI. Bonus awards for all colleagues will be made 1

4 EXECUTIVE CHAIRMAN S STATEMENT (continued) in accordance with the FSA Remuneration Code requirements as appropriate, including relevant deferral conditions. NORTHERN ROCK IN THE COMMUNITY Northern Rock has been a substantial contributor to the wider community over many years, both through the Northern Rock Foundation and through a wide and varied programme of charitable work, undertaken by colleagues throughout the business. During, Northern Rock s community strategy has been refocused towards helping communities in financial difficulty, utilising the skills and experience inherent within the Company. We have engaged with The Northern Rock Foundation and more widely to ensure our programme is focused on the areas of greatest need. In line with the commitment made when first taken into public ownership, the Foundation received a donation of 15 million from NRAM in. Such donations enable the Foundation to support community and charitable causes, mainly in the North East of England and Cumbria. Going forward, Northern Rock plc has entered into a two year rolling agreement to donate 1% of profits before tax to the Foundation. This maintains the Company s commitment to corporate and social responsibility and allows the Foundation to continue its valuable work. OUTLOOK Economic conditions remain challenging. The mortgage market in the UK continues to be relatively subdued, and the interest rate environment continues to act as a headwind for retail banks and building societies. As anticipated, Northern Rock plc was loss making for the full year but with a significantly improved financial performance in the second half of. The Board looks forward to the maintenance of that momentum in 2011, through providing customers with attractive products and high standards of service, exploring opportunities for cautiously and prudently expanding the product range, and continuing to focus on cost control. A key objective of Northern Rock plc is a return to the private sector when the time is right, in the taxpayers best interests. The selection process for corporate finance advisers to work with the Company and UKFI on the evaluation of strategic options for Northern Rock is ongoing. My colleagues across the business remain committed to delivering the highest standards of service and fair treatment of our customers and I pay tribute to the quality of what they have delivered. Ron Sandler Executive Chairman 8 March

5 THE BOARD During, the number of meetings attended by each Director was as follows: Board Audit Remuneration Risk Number of meetings held in Executive Chairman R A Sandler CBE 16/16 10/10 Non Executive Directors L P Adams 14/16 10/10 8/8 J R Coates 16/16 8/8 7/8 M A Pain 15/16 6/6 7/8 M C Phibbs 16/16 7/8 7/8 M E Fairey 12/16 4/8 10/10 Executive Directors G A Hoffman (resigned 4 November ) 13/13 R D Hunkin (resigned 31 December ) 15/16 J McConville (appointed 8 April ) 13/13 During the Chairman of each Committee was as follows: Risk Committee Mr Adams Audit Committee Mr Coates Remuneration Committee Mr Fairey Nominations Committee Mr Sandler. The Nominations Committee did not meet during. All matters with regard to Board membership and succession were discussed and agreed at meetings of the Board. The current membership of the Committees is set out on pages 6 and 7. 3

6 CORPORATE GOVERNANCE The Company s shares are held by the Treasury Solicitor as nominee for Her Majesty s Treasury and consequently, the full requirements of the UKLA s Listing Rules and the regulations under the Companies Act 2006 governing Director s remuneration (the Regulations), now known as the UK Corporate Governance Code (the Code), do not apply to the Company. This corporate governance section summarises: The composition of the Board at the date of this report; and The governance regime in place at the date of this report. The Operating and Financial Review on pages 14 to 18 also addresses certain governance matters in relation to events in. COMPOSITION OF THE BOARD The Directors in office at the date of this report are: Ron Sandler Executive Chairman Ron was Executive Chairman of the former Northern Rock between February 2008 and October 2008, and was Chairman of that company until January, when it became Northern Rock (Asset Management) plc. He was appointed Chairman of Northern Rock plc in January and appointed as Executive Chairman in November. Ron was previously Chief Executive of Lloyd s of London from 1995 to 1999, and was subsequently Chief Operating Officer of Natwest Group. He is Chairman of Phoenix Group Holdings and Ironshore Inc. Mary Phibbs Non Executive Director Mary is a Non-Executive Director and Trustee for the Charity Bank Limited. She is a Senior Advisor for Alvarez and Marsal and acting on their behalf as the interim Chief Risk Officer for Allied Irish Bank. In a 30 year career in Banking and Finance she has held a variety of senior executive positions with Standard Chartered Bank, the Australia and New Zealand Bank, the National Australia Bank, Bankers Trust Australia and the Commonwealth Bank Group. She is a Chartered Accountant. Mike Fairey Non Executive Director Mike was the Deputy Group Chief Executive of Lloyds TSB Group PLC from 1998 until his retirement in June Mike is Chairman of the Lloyds TSB pension funds, a Non Executive Director of the Energy Saving Trust and Vertex Data Sciences and president of the British Quality Foundation. Jim McConville Chief Financial Officer Jim has more than 20 years experience in the UK retail banking and insurance sectors, having held a number of senior finance and strategy related roles in Lloyds Banking Group, including Finance Director of the Insurance and Investments Division and Scottish Widows Group. Jim is responsible for Finance and Treasury at Northern Rock plc. The Company does not have a Chief Executive at the date of this report. Mr Hoffman was appointed as Chief Executive on 1 January and served until his resignation on 4 November. Laurie Adams Non Executive Director Laurie is a Non Executive Director of Novae Group plc and Citadele Bank, as the EBRD nominee. He was formerly a Non Executive Director of Siblu Holdings Limited (formerly Haven Europe Limited) and Managing Director and Global Head of Legal and Compliance of the Investment Banking Wholesale Division at ABN Amro Bank. He is a qualified solicitor and mediator. Richard Coates Non Executive Director Richard was Managing Director of Baseline Capital Limited from 2003 to 2008, a specialist mortgage data analysis and modelling organisation. For the previous 30 years he was at KPMG UK, rising through various appointments to become Senior Partner, UK Head of Financial Services. He is a Non Executive Director for Police Mutual Assurance Society Limited. Mark Pain Non Executive Director Mark is Chairman of London Square Developments (Holdings) Limited and a Non Executive Director of Punch Taverns Plc, Johnston Press Plc, Aviva Insurance UK Limited, Aviva Life Holdings UK Limited and LSL Property Services Plc. He is also a trustee at Somerset House. Mark was previously Group Finance Director of Barratt Developments Plc, and held a number of senior Executive and Board positions at Abbey National Plc including Group Finance Director and Group Sales Director. 4

7 CORPORATE GOVERNANCE (continued) GOVERNANCE STRUCTURE OVERVIEW Since the restructuring of Northern Rock on 1 January, the governance has been regulated principally by a framework document (the Framework Document ) agreed between the Company and UK Financial Investments Limited (UKFI) as manager of HM Treasury s shareholding in the Company. This sets out how the relationship between the Company and UKFI works in practice. BASIC PRINCIPLES The basic relationship between the Company and UKFI operates according to the following principles under which UKFI: Appoints the Chairman of the Board and is entitled to appoint one or more Non Executive Directors Is required to give its consent for the appointment of other members of the Board proposed for appointment by the Nominations Committee and agrees the terms on which the Directors are appointed and incentivised Agrees with the Board the high level objectives of the business plan and any revisions to it Reviews with the Board from time to time the Company s strategic options Requires that the Board is accountable to it for delivering the agreed business plan Gives the Board the freedom to take the action necessary to deliver the business plan Monitors the Company s performance to satisfy itself that the business plan is on track Must give its consent for certain significant actions. IMPLEMENTATION OF BASIC PRINCIPLES BOARD STRUCTURE AND GOVERNANCE In accordance with the Framework Document, the Company operates a corporate governance structure which, so far as practicable and in light of the other provisions of the Framework Document, or as otherwise may be agreed with UKFI, takes appropriate account of best practice for a company listed on the Official List, including the Code. The Board operates the following main committees: Audit Committee Risk Committee Remuneration Committee Nominations Committee. The work of these committees is described below. BOARD APPOINTMENTS AND MONITORING It is a key principle of the Framework Document that UKFI and the Chairman share a common view about Board composition (including size, balance of experience and background) and succession. To achieve this: The Chairman and either the Chairman of UKFI or a senior employee nominated by the Chairman of UKFI (the Nominated Official) will discuss and confirm Board composition and succession regularly in the light of performance and the requirements of the business plan One or more senior representatives of UKFI will, if so requested by UKFI, attend meetings of the Board and Committees in an observer capacity The Chairman will discuss with the Nominated Official any impending changes to Board membership The Chairman of the Nominations Committee will meet with the Nominated Official as necessary to obtain UKFI s approval to any proposed Board changes before they become subject to the formal appointment/ consent procedure The Company s Articles of Association require that each Director stands for re election at least every three years and that Directors appointed by the Board should be subject to election at the first opportunity after their appointment. The Directors to retire by rotation would be those in office longest since their previous re election. Non Executive Directors are appointed for a specified term subject to re election in accordance with the above procedures The Board ensure that suitably rigorous appraisals are made of the effectiveness of the Chairman, the Board and its Committees UKFI has certain monitoring and information access rights, and its consent has to be obtained for certain material transactions. THE BOARD The Board met 16 times during and the details of attendance at the Board and Committee meetings are given on page 3. Where Directors were absent from Board or Committee meetings, on each occasion the Board or respective Committee was satisfied with the apologies that were offered. The Board has a written schedule of matters reserved for its determination. Reserved matters include corporate governance arrangements and the relationship with UKFI, responsibility for overall management of the Company s long term objectives and commercial strategy, financial reporting and control, setting an appropriate risk appetite and maintaining a sound system of internal control and risk management, and the approval of half yearly, interim management statements and the Annual Report and Accounts. BALANCE OF EXECUTIVE AND NON EXECUTIVE DIRECTORS More than half of the Board comprises Non Executive Directors, all of whom have experience in a range of commercial or banking activities. BOARD COMMITTEES In accordance with the requirements in the Framework Document the Board has a number of Committees. The Chairman and membership of each Committee are set out below. Each Committee has detailed terms of reference clearly setting out its remit and authority. The terms of reference 5

8 CORPORATE GOVERNANCE (continued) 6 are regularly reviewed by the Board and were updated and re approved in September. The following paragraphs set out details of the Committees and the particular work that they undertake. AUDIT COMMITTEE The Audit Committee currently comprises Messrs Coates (Chairman), Pain, Fairey and Ms Phibbs. The Committee considers and, where appropriate, advises the Board on all matters relating to regulatory, prudential and accounting requirements that affect the Company. It reports to the Board on both financial and non financial controls and monitors the integrity of the financial statements of the Company and any formal announcements relating to the Company s financial performance. As part of its remit it oversees anti money laundering and whistle blowing procedures. An important aspect of its role is to ensure that an objective and professional relationship is maintained with the external auditors. The Audit Committee has responsibility for recommending the appointment, re appointment and removal of the external auditors. The Audit Committee reviews the scope and results of the annual external audit, its cost effectiveness, and the independence and objectivity of the external auditors. It also reviews the nature and extent of any non audit services provided by the external auditors. The external auditors can attend all meetings of the Audit Committee, have direct access to the Committee and its Chairman at all times and are invited at least annually to meet with the Committee in the absence of management. The Head of Internal Audit provides further assurance that the significant risks identified by the business are properly managed through attendance at key committees and delivery of the risk based audit plan. The Head of Internal Audit also has direct access to the Audit Committee and its Chairman. The Committee regularly receives reports of reviews conducted throughout the Company by the Internal Audit function. The Audit Committee met eight times in. In February, the Audit Committee reviewed and confirmed the effectiveness of the external auditors. The external auditors were consequently re appointed at the Annual General Meeting until the conclusion of the next Annual General Meeting. RISK COMMITTEE The Risk Committee currently comprises Messrs Adams (Chairman), Coates, Pain and Ms Phibbs. The main role of the Risk Committee is to review, on behalf of the Board, the key risks inherent in the business, the systems of control necessary to manage such risks, and to present its findings to the Board. This responsibility requires the Risk Committee to keep under review the effectiveness of the Company s risk management frameworks and systems of internal control, which includes financial, operational, compliance and risk management controls and to foster a culture that emphasises and demonstrates the benefits of a risk based approach to internal control and management of the Company. The Risk Committee fulfils this remit by reinforcing management s risk management awareness and making appropriate recommendations to the Board on all significant matters relating to the Company s risk appetite, strategy and policies. It is also responsible for considering the current and prospective macroeconomic and financial environment. The Risk Committee regularly reviews reports from Compliance including regulatory risks and issues and is also responsible for approval, and ongoing review and oversight of progress of the compliance monitoring plan. The Committee also receives reports from Compliance in relation to its responsibility to consider any major findings of the Financial Services Authority and management s response to any risk management review undertaken by the Chief Risk Officer, Internal Audit or the external auditors. The Risk Committee terms of reference were revised in September to delegate to the Committee authority from the Board to approve new risk policies and amendments to existing policies. To assist the Board in discharging its responsibilities for the setting of risk policy, the Risk Committee regularly reviews the Company s material risk exposures in relation to the Board s risk appetite and the Company s capital adequacy. The Risk Committee also ensures that the public disclosure of information regarding the Company s risk management policies and key risk exposures is in accordance with statutory requirements and financial reporting standards. The Risk Committee met eight times during. NOMINATIONS COMMITTEE The Nominations Committee currently comprises Messrs Sandler (Chairman) and Adams. Subject to compliance with the requirements of the Framework Document (as set out above), the Committee monitors and reviews the membership of, and succession to, the Board of Directors and the Committee makes recommendations to the Board in this regard. One of its functions is to identify potential Executive and Non Executive Directors taking into account the requirement for the members of the Board to have an appropriate range of skills and experience. The Committee did not meet during as all matters in relation to the composition of the Board were considered by the Board. REMUNERATION COMMITTEE The Remuneration Committee currently comprises Messrs Fairey (Chairman), Sandler and Adams. Subject to compliance with the requirements of the Framework Document (as set out above), the Committee is responsible for considering and advising the Board on the remuneration policy for Executive Directors and the Chairman, and for determining their remuneration packages. In discharging its responsibilities, the Remuneration

9 CORPORATE GOVERNANCE (continued) Committee can take professional advice from within and outside the Company. It is the Board s responsibility to determine the remuneration policy for Non Executive Directors within the limits set out in the Articles of Association. The Remuneration Committee also determines the level of remuneration for the Company s Executive Committee Directors (comprising management at the level immediately below the Board). The Committee met ten times during. EXECUTIVE COMMITTEE The Board delegates authority to the Executive Committee to oversee the prudent day to day management of the Company s affairs. The Committee comprises Mr Sandler (Executive Chairman), Ms Belsham (Director of Transition Management), Mr Fitzpatrick (General Counsel and Company Secretary), Mr Foad (Chief Risk Officer), Ms Lauder (Customer Service & Sales Director), Mr McConville (Chief Financial Officer), Mr Parker (Chief Operating Officer), Mr Tate (Customer & Commercial Director) and Mrs Thompson (HR Director). The Committee considers, in the first instance, all reports made to the Board and Board Committees, except in relation to matters reserved to the Board for its own determination. The function of the Committee and its sub committees, together with a description of the role and responsibilities of the Committee members, is set out in the Executive Governance Manual. A Delegated Authorities Manual which specifies the level of authority to be exercised by the Executive Committee and various individuals also exists. The following sub committees which report to the Executive Committee are in place. Operating Plan Committee Capital Management Committee Retail Products and Limits Committee Asset and Liability Committee Retail Credit Risk Committee Operational Risk and Compliance Committee Customer Performance Committee INDUCTION AND TRAINING It is the Company s policy that every Director should receive appropriate training when appointed to the Board, and subsequently as necessary. The Company s personalised induction process is designed to ensure that every new Director understands their responsibilities as a Director of the Company. The Board Governance Manual supports this process. The process also enables Directors to build an understanding of the Company, its business and the market in which it operates. To enable the Board to function effectively, all Directors have full and timely access to all information which may be relevant to the discharge of their duties and obligations. The Company also arranges additional, specific training and support for any Director who requests it. The Chairman ensures that all Directors are properly briefed on issues to be discussed at Board meetings. All Directors are able to obtain further advice or seek clarity on issues raised at Board meetings from within the Company or from external professional sources. All Directors have access to the advice and services of the Company Secretary who is responsible for ensuring that Board procedures and applicable rules and regulations are observed. Where necessary, Directors are able to take independent professional advice at the Company s expense. BOARD EVALUATION In November, a Board effectiveness appraisal was conducted by the Chairman with assistance from the Company Secretary. All Executive Directors, Non Executive Directors and the Chairman participated in an evaluation of the Board and its Committees to ensure that their operation continued to be of the highest standard. The evaluation process consisted of a series of meetings with Directors that canvassed their views on a wide range of matters including the effectiveness of the Board, its Committees and the Chairman. In addition, the evaluation also considered the Board meeting process, the composition of the Board and the interaction between the Board and its Committees. The outcome of the evaluation exercise was reported to the Board and showed that the Board and its Committees were discharging their responsibilities effectively. The appraisal produced a number of recommendations to further improve effectiveness of the Board which will be implemented during INTERNAL CONTROL AND RISK MANAGEMENT A description of the Company s approach to all aspects of financial and other risk management and the related use of derivatives is set out in notes 16 and 31 to the Accounts. Material risk exposures are maintained within the Board approved risk appetite and are subject to Board policy statements which further define specific exposure limits and controls, appropriate to each of the risks concerned. The Board of Directors is responsible for the Company s system of risk management, regulatory compliance and internal control. The systems are designed to ensure that the key risks taken by the Company in the conduct of its business are identified and evaluated so that appropriate controls are put in place to manage those risks. Such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, but not absolute, assurance against material misstatement or loss. The Board of Directors has reviewed the system of internal control and is not aware of any significant failures in internal control that arose in the business of the Company during and up to the date of approval of the accounts that have not been dealt with in accordance with the internal control procedures of the Company. The Company s Internal Audit function provides a degree of assurance as to the operation and validity of the system of internal control through the delivery of a risk based audit plan. The agreed corrective actions arising as a result of that plan are independently monitored for timely completion. 7

10 DIRECTORS REMUNERATION REPORT The issued shares of the Company are held by the Treasury Solicitor and the requirements of both the Companies Act 2006 governing disclosure of Directors remuneration (the Regulations) and the UK Corporate Governance Code (the Code) do not apply to the Company. However, throughout and in preparing this report, the Company has voluntarily complied in all material respects with both the Regulations and the provisions of the Code relating to Directors remuneration. This report is divided into three sections. The first section reports on the remuneration policies applied by the Company during and the application of these to specific Directors. The second section reports on the remuneration arrangements to be applied by the Company for The third section sets out detail of Directors individual remuneration for. REMUNERATION POLICIES AND THEIR APPLICATION TO DIRECTORS DURING THE REMUNERATION COMMITTEE The Remuneration Committee (the Committee) operated within agreed terms of reference and consisted of Mr Fairey (Chairman) and Mr Adams, and the Chairman of the Company, Mr Sandler. It met on 10 occasions during. The Committee was responsible for making recommendations to the Board on the Company s general policy relating to executive remuneration and for determining, on behalf of the Board, specific remuneration packages for the Chairman, the Executive Directors and the members of the Executive Committee, being the most senior tier of management of the Company. The Chairman and the Chief Executive were not present when their own remuneration was under consideration. The Committee took advice from both inside and outside the Company on a range of matters, including the scale and composition of the total remuneration package payable in comparable financial institutions to people with similar qualifications, skills and experience. The following persons and advisors provided advice or services to the Committee during : Internal support was provided by the Company Secretary and Human Resources Director; The Chief Executive (and Executive Chairman after 4 November ) provided advice in relation to the Executive Committee members; Hewitt New Bridge Street LLP provided advice on various matters, including the design of the Long Term Incentive Scheme which is to be implemented during 2011; Mercer Limited, who are the consulting actuaries to the Company, advised on various pension issues relating to Directors and employees; and Freshfields Bruckhaus Deringer LLP, being the Company s principal legal advisers, advised on various remuneration and service contract matters and on compliance with the Regulations. REMUNERATION POLICIES FOR EXECUTIVE DIRECTORS During, the Board adopted a company-wide remuneration policy with the aim of attracting, developing and retaining people with the appropriate skills, knowledge and expertise to run the company effectively. This policy also applied to the Company s Executive Directors whose remuneration packages comprised basic salary, bonus, pension benefits and certain other benefits in kind. During the year, Mr Hoffman, Mr Hunkin and Mr McConville served the Company as Executive Directors. On 4 November, Mr Hoffman stood down as Chief Executive and was placed on gardening leave until 30 April 2011 with full contractual benefits being paid. On 5 November, Mr Hoffman voluntarily waived all remuneration that was to be paid to him whilst on gardening leave. No lump sum termination payment was made to Mr Hoffman. Mr Hunkin resigned as a Director and left the Company on 31 December without any compensation being paid. BASIC SALARY: The Committee s objective was that Executive Directors basic salaries should be paid at an appropriately competitive level. During, the Committee undertook an extensive benchmarking exercise on Executive Director remuneration and concluded that no basic salary increases should take effect during. Relevant salary information is as follows: Mr Hoffman was paid a salary of 700,000 per annum; Mr Hunkin was paid a salary of 275,000 per annum; and Mr McConville was paid a salary of 350,000 per annum. BONUS SCHEME: In order to encourage a high performance culture with close alignment to corporate values and with the approval of UKFI, the Committee established a company-wide bonus scheme for which linked a proportion of remuneration to the performance of the Company. Under the scheme, the payment of any bonus was subject to the Company achieving a financial threshold evidenced by a sustained improvement in the Company s financial and operational performance over the relevant financial year within a prudent risk management framework. The quantum of the bonus pool made available was determined by the Board following an assessment of corporate performance against a series of scorecard objectives that were set in February. The level of individual bonus award under the scheme was based on an assessment of achievement against personal objectives. The maximum level of bonus payable to Executive Directors was 120% of basic annual salary, with on target performance resulting in a bonus level of 84%. If individual performance was deemed to be unacceptable, no bonus was payable. 8

11 DIRECTORS REMUNERATION REPORT (continued) Mr McConville received a bonus award of 185,000. No awards were made to either Mr Hoffman or Mr Hunkin. Under the scheme rules, any bonuses for Executive Directors for the financial year ended 31 December will be paid in accordance with the FSA Remuneration Code. PENSION BENEFITS: The Company paid an amount equal to 40% of Mr Hoffman s annual salary towards pension arrangements maintained by him and, in respect of Mr Hunkin and Mr McConville, 15% of their annual salary towards pension arrangements maintained by them. BENEFITS IN KIND: Executive Directors were also entitled to a car and fuel allowance and the benefit of income protection and medical insurance arranged by the Company on their behalf. In addition, Mr Hoffman and Mr McConville were entitled to the reimbursement of certain accommodation and travel expenses. EXECUTIVE DIRECTORS SERVICE CONTRACTS Mr McConville serves under a service contract dated 14 December. The contract is terminable by the Company on 24 months notice if notice is served prior to 8 April 2011 or on 12 months notice if served thereafter. Mr McConville may terminate the contract on giving 6 months notice. Mr McConville s contract may be terminated immediately by the Company on payment of an amount equal to the salary (excluding other benefits) that he would have received during his notice period. The contract contains provisions under which the termination amount would be paid in monthly instalments, with such instalments reduced by an amount equal to the monthly remuneration derived by Mr McConville from other activities commencing during the notice period. Mr Hoffman served under a service contract dated 23 July 2008, terminable by either party on 12 months notice given at any time after 1 October. Mr Hoffman s contract contained a provision whereby if terminated other than for gross misconduct, he would remain entitled to any outstanding payments to which he was entitled as compensation for the loss of his long term incentive arrangements with his previous employer (as set out in the footnote to the Directors Individual Remuneration table on page 11). As referred to above, Mr Hoffman stood down as Chief Executive and resigned from the Board on 4 November. Mr Hunkin served the Company under a service contract dated 18 August 2008, terminable by the Company serving 12 months notice or by Mr Hunkin giving 6 months notice. Mr Hunkin resigned as a Director with effect from 31 December. Under the terms of a services agreement between Northern Rock (Asset Management) plc (NRAM) and the Company dated 7 December, the Company was required to provide certain services to NRAM for a period of time following its restructuring. In accordance with the services agreement, the Company invoiced NRAM monthly in arrears for the cost of services rendered to it plus a margin of ten per cent. On this basis, 50 per cent of employment costs relating to Mr Hoffman, Mr McConville and Mr Hunkin were charged to NRAM, plus the margin. POLICY ON EXTERNAL NON-EXECUTIVE DIRECTORSHIPS HELD BY EXECUTIVE DIRECTORS Executive Directors were permitted to hold one external non-executive directorship unrelated to the Company s business, provided that the time commitment was not material. Executive Directors were permitted to retain any fees arising from such a nonexecutive directorship. Mr Hoffman was permitted to continue with all non-executive directorships held by him at the date of his appointment to the Board, and to retain the fees arising from these. REMUNERATION POLICIES FOR THE CHAIRMAN AND NON-EXECUTIVE DIRECTORS The fees for the Chairman and Non- Executive Directors described below were set with reference to external benchmarks and at levels sufficient to attract the calibre of individual needed to oversee the strategy and management of the Company whilst in Temporary Public Ownership. The Executive Chairman and the Non-Executive Directors were entitled to fees from the Company but were not permitted to participate in bonus, incentive or pension schemes or receive benefits in kind, other than reimbursement for travel and other reasonable expenses incurred in the furtherance of their duties and in attending Board and Committee meetings. Mr Sandler commenced his appointment as Non-Executive Chairman on 1 January and served the Company under a letter of appointment dated 22 December. On 4 November, Mr Sandler was appointed Executive Chairman with no increase to his fee of 250,000 per annum. Unless otherwise extended by the Company, his appointment terminates on 31 December 2012 or on either party serving four months notice at any time. In anticipation of a return to the private sector, the Company may also provide notice at any time that it considers appropriate so that the appointment may terminate on the day that the Company is returned to the private sector. The fees paid to Non-Executive Directors during were as follows: Non-Executive Director s Basic Fee 50,000 Additional Fee for Membership of a Board Committee 5,000 Additional Fee for Chairman of the Risk Committee 20,000 Additional Fee for Chairman of other Board Committees 15,000 All Non-Executive Directors referred to below served under letters of appointment terminable by either party serving three 9

12 DIRECTORS REMUNERATION REPORT (continued) months notice at any time. The Company may also provide notice at any time such that the appointment may terminate on the day that the Company is returned to the private sector. Set out below are details of the fee arrangements of the Non-Executive Directors who served the Company during : (a) Mr Adams and Mr Coates were appointed as Non-Executive Directors of the Company by letters of appointment dated 26 November expiring on 19 November Mr Adams and Mr Coates were entitled to the basic fee of 50,000 per annum. Mr Adams was entitled to an additional fee of 20,000 per annum for chairing the Risk Committee and a further additional fee of 10,000 per annum for membership of the Remuneration and Nominations Committee. Mr Coates was entitled to an additional fee of 15,000 per annum for chairing the Audit Committee and a further additional fee of 5,000 for membership of the Risk Committee. (b) Mr Pain, Ms Phibbs and Mr Fairey were appointed as Non-Executive Directors of the Company under letters of appointment dated 14 December, 11 December and 14 December, respectively. The appointments were for a fixed term of 2 years commencing on 1 January and expiring on 1 January Mr Pain, Ms Phibbs and Mr Fairey were each entitled to a basic fee of 50,000 per annum. Mr Pain and Ms Phibbs were entitled to an additional fee of 5,000 per committee per annum in respect of their membership of each of the Audit and Risk Committees. Mr Fairey was entitled to receive an additional fee of 15,000 as Chairman of the Remuneration Committee and 5,000 per annum in respect of his membership of the Audit Committee. REMUNERATION ARRANGEMENTS FOR THE COMPANY IN 2011 COMPLIANCE The Company intends to continue to comply in all material respects with the relevant regulations and the provisions of the Code relating to Directors remuneration throughout THE REMUNERATION COMMITTEE The Committee will continue to operate pursuant to its terms of reference and will remain responsible for making recommendations to the Board on the Company s general policy relating to executive remuneration and for determining, on behalf of the Board, specific remuneration terms for the Chairman and any Executive Directors employed in the future. It will also remain responsible for oversight of the remuneration for Executive Committee members. REMUNERATION OF EXECUTIVE DIRECTORS During 2011, the remuneration policies (including the policy on executive service contracts) will remain closely aligned to achievement of the objectives of the business plan. To reflect the additional responsibilities undertaken by Mr McConville following the departure of Mr Hoffman, Mr McConville s basic salary will be increased by 10% from 1 January 2011 until either a new CEO is appointed or the Company exits Temporary Public Ownership. This additional allowance is non-pensionable and will not be taken into account when calculating any bonus payment that may become due to Mr McConville. A bonus scheme will operate in 2011 on similar terms to that which operated during. The Remuneration Committee considers that the terms of this bonus scheme provide an appropriate link between reward and performance whilst reflecting emerging best practice relating to bonus payments. As in, this scheme will allow Executive Directors to earn up to 120% of their annual salary if the maximum level of corporate and individual performance is achieved. On target performance would allow Executive Directors to earn up to 84%. Bonuses will only become payable where the Board has clear evidence that a sustained improvement in the Company s financial and operational performance within a prudent risk framework has been achieved over the course of the year. In addition to the short term bonus scheme, the Company will operate a Long Term Incentive Plan (LTIP) for senior employees that will deliver financial rewards if the Company achieves certain targets over a three year performance period. As the Company did not make LTIP awards in, it is the Company s intention to make awards in 2011 covering and The award will vest in March 2013 and the 2011 award in March 2014, or upon successful exit from Temporary Public Ownership, if earlier. The Remuneration Committee will be responsible for setting the performance conditions that will apply to awards made under this scheme which will include a financial performance target and a quality of earnings assessment. The quality of earnings assessment will seek to establish the extent to which the financial performance of the Company over the three year period was attributable to the efforts of management, as opposed to external market factors. At the outset, the Remuneration Committee will set a threshold, target and stretch level of financial performance for the Company, and the LTIP will operate for Executive Directors as follows:- At the threshold level of performance, the LTIP award will be 11.25%; At the target level of performance, the LTIP award will be 50% of basic salary; and At the stretch level of performance, the LTIP award will be 75% of basic salary. Between these levels of performance, vesting will occur on a straight line 10

13 DIRECTORS REMUNERATION REPORT (continued) basis. Application of the quality of earnings assessment by the Remuneration Committee could cause the LTIP award to increase or decrease by up to one third. It has also been agreed that LTIP awards for Executive Directors will be increased by up to 50% to reflect the additional responsibilities undertaken following the departure of Mr Hoffman. REMUNERATION OF THE EXECUTIVE CHAIRMAN AND NON-EXECUTIVE DIRECTORS There will be no change to the fees of the Chairman and Non-Executive Directors in DIRECTORS INDIVIDUAL REMUNERATION IN Details of Directors individual remuneration are set out below: Salary/ Pension Benefits in Total for fees contributions Bonus Kind 2 Other Chairman R A Sandler CBE Executive Directors G A Hoffman ,318 R D Hunkin J McConville Non Executive Directors L P Adams J R Coates M E Fairey M Pain M Phibbs , ,788 1 As disclosed in the announcement of his appointment, Mr Hoffman was entitled to three annual payments of 400,000 (less deductions) as compensation for the loss of entitlements under long term incentive arrangements with his previous employer. The first payment was made on 1 October 2008 and the second made on 25 January, having been deferred from 1 October. The final payment was due on 1 October and was paid on 25 October. 2 Benefits in kind includes 27,612 travel and accommodation costs paid to Mr Hoffman plus an associated charge to taxation of 25,121, and 6,853 travel and accommodation costs paid to Mr McConville plus an associated charge to taxation of 6, Mr McConville waived his contractual entitlement to a relocation allowance and was provided with an accommodation allowance of 20,000 for the period from 6 November to 5 November 2011, of which a portion has been paid in advance. 4 1,088,000 was reimbursed by Northern Rock (Asset Management) plc to the Company under the Services Agreement pursuant to a provision which entitles the Company to be reimbursed 50% of the aggregate employment costs relating to Mr Hoffman, Mr McConville and Mr Hunkin plus a margin of 10%. For, the remuneration of the highest paid Director was 1,081,000 plus personal pension arrangements of 237,000. M E Fairey Chairman of the Remuneration Committee 8 March

14 CORPORATE SOCIAL RESPONSIBILITY REPORT INTRODUCTION At Northern Rock plc we recognise the importance of acting correctly as a company and as such Corporate Social Responsibility (CSR) is a fundamental element of the way we do business. From the way we treat our customers and colleagues, work with our suppliers and engage with our community we believe in doing our utmost to behave responsibly. CUSTOMERS We have over one million customers and our aim is to offer products and services in an open, honest and fair way. As our market and customers environment changes we are investing more time and resource in understanding customer needs. This is helping us to design product features and benefits that respond to these changes especially in the way that customers want to purchase from us. We regularly gauge customer opinion monitoring satisfaction and advocacy ratings and also how our brand is perceived by consumers in general. In addition, we invest a considerable amount of time and energy in ensuring that we Treat Customers Fairly day in, day out. This is demonstrated in our vision and culture. BUSINESS ETHICS AND HUMAN RIGHTS COMPETITIVE FRAMEWORK Northern Rock plc is determined to ensure that it does not take unfair advantage of Government support during the period of public ownership. The Company has agreed to and complied with a revised set of compensatory measures as part of the EC State aid process, approval for which was granted on 28 October, and has actively managed its product range during the year to maintain balances and pricing within the parameters of the measures. TREASURY Treasury dealing takes place in accordance with the rules and guidance in the Financial Services Authority (FSA) Handbook. Any treasury dealing outside the detailed scope of the FSA regulation, such as money market deposits and foreign exchange, is covered by the Non Investment Products Code (NIPs Code). This is a voluntary code, endorsed by the FSA, that lays down what is generally considered to be good market practice. The Company does not deal with counterparties who are on sanctions lists published by HM Treasury. In addition, all potential new counterparties, and their beneficial owners, are reviewed to ensure they are not classified as Politically Exposed Persons. We conduct periodic reviews to assess how our policies, procedures and practices compare to FSA regulations and best practice in the NIPs Code. BETTER PAYMENT PRACTICE The Company recognises the importance of making supplier payments on time, thereby ensuring that our suppliers do not encounter unnecessary cash flow problems as a result of late payments being made. The provisions of the relevant legislation have been fully communicated and implemented to ensure that we will not incur risks to reputation as a result of non compliance. The only invoices not meeting the agreed payment date should be those subject to query or dispute. PENSION SCHEME The investments of the Company s pension schemes are held by the Trustees in pooled funds. The Trustees expect the managers of pooled funds used for such purposes to adhere to the UK Stewardship Code. WORKPLACE COLLEAGUE ENGAGEMENT It is essential that the Company maintains a highly engaged workforce. It makes our Company a more attractive place to join, work in and do business with. It is proven that those companies with a high engagement score have colleagues that display pride and loyalty to the Company which leads to enhanced performance and improved customer satisfaction. The benefits can be reduced absences and sickness, greater job satisfaction, improved performance and greater achievement. To ensure we understand the levels of colleague engagement we regularly survey colleagues and the results are used to identify any areas affecting colleague engagement and determine required actions. HEALTH AND SAFETY HEALTH & SAFETY POLICY Our Health and Safety Policy is approved by the Board and includes Executive responsibility for leadership on Health and Safety issues. A comprehensive accident reporting and investigation process is in place and we have worked closely with our insurers to ensure that we continue to apply best practice. In there were 2 RIDDOR reportable accidents. Occupational Health and Physiotherapy Services are provided to support colleagues as part of our attendance management programme. The work force is predominantly sedentary in nature. Workstation assessments are undertaken annually or where a colleague is relocated. During the year a total of 2,083 workstation assessments were completed and 56% of these resulted in minor adjustments or additional equipment being provided. ENVIRONMENT The key environmental impacts arising from our corporate operations are the use of energy and water, carbon dioxide emissions from corporate transport and waste. Where practical we are committed to ensuring that environmental awareness and best practice form an integral part of our decision making process. ENERGY The Company is committed to controlling the environmental impact from its use of energy and this is demonstrated by its accreditation to the Energy Efficiency Scheme which is operated by The Carbon Trust. This is an area where we seek continuous improvement and during smart meters have been fitted in all of our sites. This will improve our ability to manage consumption by providing on line data. 12