LISTING PARTICULAR 30th September, 1994 NORTHERN ROCK BUILDING SOCIETY. (incorporated in England under the Building Societies Act 1986) 20,000,000

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1 LISTING PARTICULAR 30th September, 1994 NORTHERN ROCK BUILDING SOCIETY (incorporated in England under the Building Societies Act 1986) 20,000, /8 per cent. Permanent Interest Bearing Shares ("TIBS") (being formerly 20,000, /8per cent. Permanent Interest Bearing Shares of North of England Building (the "North of England PIBS"))??? Application has been made to The International Stock Exchange of the United Kingdom and the Republic of Ireland Limited (the "London Stock Exchange") for the PIBS comprising 20,000 PIBS of 1,000 each to be admitted to the Official List. Subject to the transfer of engagements of North of England Building ("North of England") to the Northern Rock Building (the "") becoming effective (which is expected to take place on 1st October, 1994), the PIBS will succeed the North of England PIBS without alteration in their terms. It is expected that listing of the PIBS will become effective and dealings will commence on 3rd October, The listing of the PIBS will be expressed as a percentage of their principal amount (excluding accrued interest). The PIBS will be deferred shares in the for the purposes of Section 119 of the Building Societies Act 1986 and will not be protected investments for the purposes of the Building Societies Investor Protection Fund. Attention is drawn to certain risk factors set out on page 12. The PIBS cannot be withdrawn at the option of the PIBS holder and are repayable only in certain limited circumstances as described in paragraph 4 of "Special Conditions of the PIBS Repayment".

2 This document comprises listing particulars given in compliance with the listing rules made by the London Stock Exchange for the purpose of giving information with regard to the and its subsidiaries and the PIBS. The directors of the, whose names appear on pages 15 and 49 to 51 together with those directors of North of England whose names appear on page 15, accept responsibility for the information contained in this document save for any such information for which the directors of North of England have taken responsibility in accordance with the following paragraph. To the best of the knowledge and belief of the directors of the (who have taken all reasonable care to ensure that such is the case) the information contained in this document (save as aforesaid) is in accordance with the facts and does not omit anything likely to affect the import of such information. The directors of North of England, whose names appear on pages 78 to 79 (with the exception of Mr Robert A Edmonds who is no longer a director of North of England) accept responsibility for all information relating to North of England contained in this document. To the best of the knowledge and belief of the North of England directors (who have taken all reasonable care to ensure that such is the case) such information is in accordance with the facts and does not omit anything likely to affect the import of such information. Copies of this document have been delivered to the Registrar of Companies in England and Wales for registration in accordance with section 149 of the Financial Services Act No person is authorised to give any information or to make any representation not contained herein and any information or representation not contained herein must not be relied upon as having been authorised by the, North of England or S.G.Warburg Securities Ltd. Neither the delivery of this document nor any sale or purchase made in connection herewith shall, under any circumstances, constitute a representation or create any implication that there has been no change in the affairs of the since the date hereof. This document does not constitute an offer of, or an invitation by or on behalf of the or S. G. Warburg Securities Ltd. to subscribe for or purchase, any of the PIBS. The distribution of this document and the offering of the PIBS in certain jurisdictions may be restricted by law. Persons into whose possession this document comes are required by the and S.G.Warburg Securities Ltd. to inform themselves about, and to observe, any such restrictions. A further description of certain restrictions on the offering and sale of the PIBS and on the distribution of this document is given under "Transactions in PIBS" on page 83. The information contained in this document is intended for sophisticated investors capable of understanding the nature of the PIBS and the risks attaching to them. Attention is drawn to certain risk factors relating to the PIBS set out on page 12. In this document, unless otherwise specified or the context otherwise requires, references to "pounds", "sterling" or " '" are to the lawful currency of the United Kingdom. All references to the "Act" are to the Building Societies Act 1986, which expression shall include, where applicable, any statutory modification or re-enactment thereof or any statutory instrument, order or regulation made thereunder or under any such statutory modification or re-enactment. 2

3 TABLE OF CONTENTS Page Merger with North of England 4 Summary of the key provisions of the Rules of the and the Building Societies Act 1986 relating to the PIBS 5 Special conditions of issue of the PIBS 8 Risk factors 12 Certain provisions of the Building Societies Act 1986 and the role of the Building Societies Commission 13 Northern Rock Building 15 Capitalisation Statements 19 Interim Accounts of Northern Rock Building Group 21 Interim Accounts of North of England Building Group 23 Financial Statements of Northern Rock Building and Group 25 Directors' Report and Annual Business Statement of the 45 Auditors' Report to the Members of the 54 Financial Statements of North of England and the North of England Group 55 Directors' Report and Annual Business Statement of the North of England Building 74 Auditors' Report to Members of North of England 81 United Kingdom Taxation 82 Transactions in PIBS 83 General information 84 3

4 MERGER WITH NORTH OF ENGLAND It is expected that on 1st October, 1994 a transfer of all of the engagements of North of England will be made to the under Section 94 of, and Schedule 16 to, the Building Societies Act 1986 (the "Act"). At such time the North of England PIBS shall become deferred shares of the without alteration in their terms. The North of England PIBS will be listed as PIBS of the and the current listing of the North of England PIBS will be cancelled. These listing particulars have been prepared on the basis that such transfer of engagements will become effective on 1st October, The North of England PIBS were first admitted to the Official List on 26th June, 1992, pursuant to an offering circular dated 23rd June, Application has been made to the London Stock Exchange for the PIBS to be admitted to the Official List and it is expected that listing of the PIBS will become effective and dealings will commence on 3rd October,

5 SUMMARY OF THE KEY PROVISIONS OF THE RULES OF THE SOCIETY AND THE BUILDING SOCIETIES ACT 1986 RELATING TO THE PIBS The rights and restrictions attaching to the PIBS will be governed by the Rules of the {the "Rules") and the Special Conditions of Issue of the PIBS. Set out below is a summary of the key provisions of the Rules and certain provisions of the Act insofar as they affect the rights of PIBS holders. Terms defined in the Rules will, unless the context otherwise requires, have the same meanings when used in this summary. The "Notes" set out below are for explanation only and do not form part of the Rules. 1. GENERAL The person whose name is entered in the records of the as a holder of PIBS or a fraction of a PIBS (a "PIBS holder") is a member of the. Each PIBS holder and any person claiming through him or on his account is bound by the Rules and by the provisions of the 's Memorandum. A PIBS holder shall, on demand, be given a copy of the Rules and of the 's Memorandum: (a) free of charge, if he has not previously been given a copy; or (b) upon payment of 1 or such other fee as may be duly prescribed from time to time by the Building Societies Commission (the "Commission") if he has already been given a copy. 2. REGISTER The shall maintain a Register in which shall be entered the name and address of each PIBS holder. Each PIBS holder is obliged by the Rules to notify the immediately of any change of name or address and shall produce such evidence of a change of name as the may require. Transfer of any PIBS shall also be recorded in the Register. There will be no charge made in respect of any entry in the Register relating to the PIBS. The Register shall be maintained at the Principal Office of the or at such other place as the Board shall think fit. Note: The has appointed The Royal Bank of Scotland plc as its Registrar for the PIBS. The Royal Bank of Scotland are the existing Registrars for the North of England PIBS. 3. TITLE Except as otherwise provided in the Rules or as otherwise required by law, the shall be entitled to treat the registered holder of any PIBS as the absolute owner thereof and accordingly it shall not, except as ordered by a court of competent jurisdiction or as required by statute, be bound to recognise any trust or equitable or other claim to or interest in or charge on or security over such PIBS (whether partial or otherwise) on the part of any other person whether or not it shall have express or other notice thereof nor be held responsible for omitting or neglecting to recognise any such claim. 4. PIBS CERTIFICATE Each PIBS holder shall be furnished, within one month of being entered in the Register, with a PIBS Certificate. 5. REPLACEMENT OF PIBS CERTIFICATES Any PIBS holder losing his PIBS Certificate shall immediately give notice in writing of such loss to the at its Principal Office. If a PIBS Certificate is damaged, or is alleged to have been lost, stolen or destroyed, a new PIBS Certificate shall be issued to the PIBS holder upon request, subject to delivery up of the old PIBS Certificate or (if it is alleged to have been lost, stolen or destroyed), subject to compliance with such conditions as to evidence and indemnity as the Board of Directors of the (the "Board") may think fit and to the payment of any exceptional expenses of the incidental to its investigation of the evidence of such alleged loss, theft or destruction. Where a holder of PIBS has sold part of his holding, such holder will be entitled to a PIBS Certificate for the balance without charge. 5

6 6. TRANSFERS A PIBS may be transferred to any person without the approval of the Board and shall be free from all liens in respect of liabilities to the. The transfer of a PIBS shall be registered without payment of any fee. No transfer shall be valid unless made in a form approved by the Board and until registered in the Register. The transferor shall cease to be the holder of the PIBS when his name is no longer entered in the Register as the holder of the PIBS or a fraction of the PIBS. The registration of transfers of PIBS, or of any class of PIBS, may be suspended at such times and for such periods as the Board may determine but not for more than 30 days in the year and notice of such suspension shall be given by advertisement in at least one national daily newspaper. Two or more persons may jointly hold PIBS but no PIBS shall be issued to the holders, or shall be held by them at any time, as tenants in common. The Board may decline to issue any PIBS to more than four persons jointly. 7. LIENS A fully-paid PIBS shall be free from all liens in respect of liabilities to the. 8. MEETINGS As members of the, PIBS holders will, subject to the provisions of the Rules, be entitled to receive notice of, to attend, to be counted in a quorum and to vote at general meetings of the. A member of the who is entered in the records of the as the holder of any PIBS at the voting date will be entitled to vote on a resolution (whether special or ordinary) other than a borrowing members' resolution if he is not a minor, and in the case of a joint holding of PIBS, is named first in the records of the in respect of that PIBS and if he was also a member of the at the end of the last financial year before the voting date and if he was a holder of shares with a principal amount of 100 or more (or such other amount which may be duly prescribed by the Commission from time to time) at: (i) the end of the financial year before the voting date; or (ii) if the voting date falls during that part of the financial year which follows the conclusion of the Annual General Meeting commenced in that year, the beginning of the period of 56 days immediately preceding the voting date for members voting in person at a Special General Meeting, and has not ceased to be a member at any time between the time referred to in (i) or (ii) (as applicable) and the voting date. Each PIBS holder will have one vote at general meetings of the regardless of the principal amount of PIBS or other shares held by that holder. At a meeting of the either the Chairman of the meeting or at least 10 members who are entitled to vote at the meeting and are present in person, by proxy, or otherwise pursuant to the Rules may demand a poll. A PIBS holder shall be entitled to one vote on a poll. The Rules may be altered or rescinded or added to by passing a resolution as a special resolution. 9. WINDING UP AND DISSOLUTION If the shall be wound up or dissolved by consent (other than in connection with the transfer of the business of the to a company or amalgamation of the or a transfer of the 's engagements) any surplus remaining after payment of the 's creditors and repayment to members of the amount of their shares (together with interest due thereon) according to their priority under their respective terms and conditions of issue shall be applied as follows: (a) up to 20 per cent. to holders of all or some of the deferred shares (including PIBS). The proportion (if any) of such 20 per cent. to which any particular issue of deferred shares (including PIBS) is entitled shall be set forth in the terms and conditions of issue of that issue of deferred shares (see Note below); and 6

7 (b) the remainder among the qualifying members (other than holders of deferred shares including PIBS) in proportion to the value of their shareholding. If there are insufficient assets to repay all members the amounts paid up on their shares, no repayments shall be made in respect of any deferred share (including PIBS) until after all other members have been repaid in full. Note: Notwithstanding paragraph 9(a) above, the Special Conditions of Issue of the PIBS provide that PIBS holders will not be entitled to share in any final surplus on a winding-up or dissolution of the. 10. DISPUTES AND LEGAL PROCEEDINGS Subject to the provisions of Section 1 of the Courts and Legal Services Act 1990, Section 85 and Schedule 14 to the Act provide that in relation to the no court other than the High Court of Justice in England shall have jurisdiction to hear and determine disputes between a building society and a member or a representative of a member in that capacity in respect of any rights or obligations arising from the Rules or the Act or any statutory instrument made under it. Pursuant to Section 1 of the Courts and Legal Services Act 1990, the High Court and County Courts Jurisdiction Order 1991 No. 724 has been made which empowers the High Court to transfer cases over which it has jurisdiction to the County Court. Complaints by members who are individuals may be made to the Office of the Building Societies Ombudsman in accordance with Section 83 of the Act. 11. SALE OF PIBS OF UNTRACEABLE HOLDERS The Rules regarding the sale of the PIBS of untraceable holders are summarised in paragraph 7 of the Special Conditions of Issue of the PIBS. 7

8 SPECIAL CONDITIONS OF ISSUE OF THE PIBS The following are the Special Conditions of Issue of the PIBS in the form in which they will appear on the reverse of each PIBS Certificate: The PIBS {as defined below) are issued subject to, and with the benefit of, these Special Conditions of Issue (the "Conditions''). 1. GENERAL (1) The "" means Northern Rock Building. (2) "PIBS" means the 125/8 per cent. Permanent Interest Bearing Shares of the and, unless the context otherwise requires, includes any further deferred shares issued pursuant to Condition 10 below and forming a single series with the PIBS. (3) Terms defined in the Rules of the (the "Rules") will, unless the context otherwise requires, have the same meanings when used in these Conditions. (4) PIBS holders are entitled to the benefit of, are bound by, and are deemed to have notice of, the Rules. (5) The PIBS: (a) are deferred shares for the purposes of Section 119 of the Building Societies Act 1986 or any amendment thereof (the "Act"); (b) are not protected investments for the purposes of the Building Societies Investor Protection Fund provided for under the Act; (c) are not withdrawable; and (d) are permanent interest bearing shares for the purposes of the Rules. (6) The expressions "Creditors" and "Relevant Supervisory Consent" shall have the meanings given in Conditions 4(2) and 4(4) respectively. (7) Upon a transfer of a PIBS, the will procure that the new PIBS holder is issued with a PIBS Certificate within one month of the lodging of the instrument of transfer. 2. FORM, DENOMINATION AND TITLE The PIBS are in registered form and are available and transferable in accordance with the Rules in amounts and integral multiples of 1, INTEREST (1) The PIBS bear interest from and including 30th June, 1992 at the rate of 125/8 per cent. per annum (less tax where appropriate) payable, subject as provided below, in arrear by equal half-yearly instalments on 30th June and 31st December in each year. Each half-yearly period is referred to as an "Interest Period". Interest on the PIBS is non-cumulative as described below. The interest payment in respect of a period of less than a half-year will be calculated on the basis of the number of days elapsed and a year of 365 days and by rounding the resultant figure to the nearest penny (a half penny being rounded upwards). (2) Interest in respect of the PIBS shall not be paid or credited in respect of any Interest Period if the has at any time before the date for payment of the interest cancelled the payment of any interest or dividend upon: (a) any other shares of any class (other than deferred shares (as defined in the Act)) of the ; or (b) any deposit with the which falls, in accordance with the terms of the share or deposit, to be paid or credited at any time before the end of the relevant Interest Period. 8

9 For the purposes of this paragraph (2): (a) where the has deferred or suspended any payment, it shall be taken to have cancelled the payment for so long as the payment remains outstanding; and (b) a payment is to be taken to fall to be paid or credited in circumstances where it would have so fallen but for any provisions relating thereto entitling the to cancel, defer or suspend payment. (3) Interest in respect of the PIBS shall not be paid or credited for any Interest Period specified by the Board, if the Board is of the opinion that: (a) there has been a failure by the to satisfy the first criterion of prudent management set out in Section 45(3) of the Act and such failure is then continuing; or (b) the payment or crediting of the interest or, as the case may be, payment or crediting in full of the interest would cause or contribute to such a failure by the, and in such case the Board passes a resolution cancelling or, as the case may require, reducing, the interest to such extent as may be necessary to secure that there will be no failure to satisfy the first criterion of prudent management and on the passing of the resolution the PIBS holder shall cease to have any right to the interest for that period so cancelled or, as the case may be, any interest other than the reduced amount payable in accordance with that resolution. (4) If and to the extent that paragraphs (2) or (3) above prohibit the payment of interest, interest in respect of the PIBS will be cancelled and PIBS holders will have no rights in respect of the cancelled interest. 4. REPAYMENT (1) The PIBS constitute permanent non-withdrawable deferred shares in the and have no specified final maturity. (2) The PIBS will become repayable on the date that an instrument or order is made or an effective resolution is passed for the winding-up or, otherwise than by virtue of Section 93(5), Section 94(10), Section 97(9) or Section 97(10) of the Act, dissolution of the but only if and to the extent that and subject to the condition that all sums due from the to Creditors claiming in the winding-up or dissolution have been paid in full. For the purposes of these Conditions, "Creditors" means all creditors (including all subordinated creditors) of the and members holding shares (other than deferred shares) as regards the principal and interest due in respect of those shares. (3) The claims of PIBS holders in a winding-up or dissolution of the will be for the principal amount of their PIBS together, subject to Condition 3, with interest accrued to but excluding the date of repayment after all sums due from the to Creditors have been paid in full. PIBS holders will not be entitled to any share in any final surplus upon a winding-up or dissolution of the. (4) The may, having obtained prior Relevant Supervisory Consent, and for so long as the PIBS are listed on The International Stock Exchange of the United Kingdom and the Republic of Ireland Limited (the "London Stock Exchange"), subject to and in accordance with the requirements from time to time of the London Stock Exchange, purchase any PIBS. In the case of purchases by tender, tenders shall be made available to all PIBS holders alike. For the purposes of these Conditions, "Relevant Supervisory Consent" means consent to the relevant purchase given by the Building Societies Commission. (5) All PIBS repaid or purchased by the as aforesaid shall be cancelled forthwith and such PIBS may not be reissued or resold. 5. PAYMENTS All payments in respect of the PIBS will be made by sterling cheque drawn on a bank in London and posted on the day (other than a Saturday or a Sunday) on which banks are open for business in London immediately preceding the relevant due date to the sole or first named holder of the PIBS appearing in the Register of members of the at the close of business on the fifteenth day before the relevant due date (the "Record Date") at his address shown in the Register of members of the on the Record Date. Upon application of the sole or first named PIBS holder to the, in the form from time to time 9

10 prescribed by the, on or after the Record Date but not less than ten days before the due date for any payment in respect of a PIBS, the payment may be made by transfer on the due date to a sterling account maintained by the payee with a bank in London. 6. SUCCESSION AND TRANSFERS (1) Upon an amalgamation by the with another building society under Section 93 of and Schedule 16 to the Act or a transfer of its engagements to any extent to another building society under Section 94 of and Schedule 16 to the Act, the PIBS shall be deferred shares in the transferee building society without any alteration in their terms. (2) Upon a transfer by the of the whole of its business to a successor in accordance with Section 97 of the Act, the successor will, in accordance with Section 100(2)(a) of the Act, assume as from the vesting date a liability (subject to this paragraph) to every qualifying member of the as in respect of a deposit made with the successor corresponding in amount to the value of the qualifying shares held by the member in the. The liability assumed by the successor in respect of each PIBS shall be as in respect of a non-transferable deposit carrying the same rate of interest as the PIBS (each being a "Deposit"). Each Deposit will be applied on behalf of the holder in the subscription of a principal amount of perpetual subordinated notes of the successor (the "Notes") carrying the same rate of interest as the PIBS equivalent to the principal amount of the Deposit. In the case of a transfer by the of the whole of its business to a company which is an existing company (as defined in the Act), the application of each Deposit will occur on the vesting date (or as soon as reasonably practicable thereafter). In the case of a transfer by the of the whole of its business to a company which is a specially formed company (as defined in the Act), the application of the Deposit will occur either automatically on the date occurring five years after the vesting date or earlier subject to such conditions as the directors of the successor may require, including the receipt of a certificate in such form as they may reasonably require from the holder of any Deposit, that the effect of the allotment of the Notes would not result in more than the permitted proportion (as defined in Section 101 of the Act) (currently, 15 per cent.) of the total indebtedness of the successor on its debentures being held by, or by nominees for, the holder of the Deposit. The form of the certificate required will be sent to holders of PIBS prior to the vesting date. The terms of each Deposit and the terms and conditions of the Notes will be such as to secure in the opinion of the Board that they will be: (i) treated as capital designated perpetual subordinated debt (as referred to in the Bank of England Notice to institutions authorised under the Banking Act 1987 BSD/1990/2 of December 1990 as replaced, amended or supplemented from time to time) or its equivalent (if any) as determined by the auditors of the for the purposes of capital adequacy regulations made from time to time by the Bank of England; and (ii) subordinated debt (as defined in the Building Societies (Designated Capital Resources) (Permanent Interest Bearing Shares) Order 1991). The terms of the Deposits and the terms and conditions of the Notes will, not later than the time at which notice is given to members of resolutions to be proposed to approve such transfer, be available for inspection by PIBS holders at the Principal Office and, subject as provided above, will be determined by the Board in its absolute discretion. (3) The undertakes to procure that any amalgamation or transfer referred to in paragraph (1) or (2) above will comply with the terms of the provisions of paragraph (1) or, as the case may be, (2) above. 10

11 7. UNCLAIMED INTEREST The shall be entitled to sell for the best price reasonably obtainable any PIBS if: (a) at least three interest payments in respect of the relevant PIBS have become payable, no interest payment has been claimed, no cheque in respect of the PIBS has been cashed and no communication has been received from the member or the person entitled to the PIBS, in each case during the Relevant Period; and (b) after expiry of the Relevant Period the gives notice by advertisement in two national daily newspapers of its intention to sell the PIBS, no communication has been received from the member within three months after publication of such advertisements or before the exercise of the power to sell the PIBS and the gives written notice to the Listing Department of the London Stock Exchange of such intention to sell. "Relevant Period" means the period of twelve years immediately preceding the publication of the first of any advertisements referred to above. The net proceeds of the sale of any PIBS shall be owed to the former PIBS holder as a debt and shall not bear interest. Any moneys not accounted for to the former holder shall be carried to a separate account and shall be a permanent debt of the. The shall not be a trustee for the former PIBS holder. 8. VARIATION OF THESE CONDITIONS (1) These Conditions may be varied by the with the consent in writing of the holders of three-quarters in principal amount of the PIBS or with the sanction of a resolution passed at a separate meeting of the PIBS holders held in accordance with Condition 9 by a majority of three-quarters in principal amount of such holders voting in person or by proxy. (2) The undertakes not to initiate any change to the Rules that is both (a) inconsistent with the provisions of these Conditions and (b) materially prejudicial to the interests of the PIBS holders. (3) These Conditions do not limit the rights of members to change the Rules. (4) Any amendment to the Rules which is both (a) inconsistent with the provisions of these Conditions and (b) materially prejudicial to the interests of the PIBS holders shall not limit any rights of PIBS holders to bring an action for breach of contract against the in circumstances where the is in breach of the terms of these Conditions nor afford the any defence to any claim made in any such proceedings. 9. MEETINGS OF PIBS HOLDERS All the provisions of the Rules, relating to general meetings of the or to proceedings at general meetings shall apply, mutatis mutandis, to every separate meeting of PIBS holders except that: (a) the necessary quorum at any such meeting shall be two persons holding or representing by proxy at least one third in principal amount of the PIBS; (b) PIBS holders shall, on a poll, have one vote in respect of every 1,000 principal amount of PIBS held by them; and (c) a poll may be demanded by any one PIBS holder whether present in person or by proxy. 10. FURTHER ISSUES The shall be at liberty from time to time without the consent of the PIBS holders to create and issue further deferred shares either: (1) ranking pari passu in all respects (or in all respects save for the first payment of interest thereon) and so that the same shall be consolidated and form a single series with the outstanding deferred shares of any series (including the PIBS); or (2) upon such other special terms of issue as the may at the time of issue determine provided that the shall not issue any deferred shares ranking ahead of the PIBS. 11

12 RISK FACTORS Investors should be aware that the terms of the PIBS vary considerably from the terms of ordinary building society share accounts. They should particularly note that: (a) the principal amount of the PIBS is not repayable and the PIBS are not withdrawable and accordingly the only way that the PIBS may be realised is by a sale at such price and on such terms as may from time to time be available in the market (which may mean that the investor does not recoup his investment) which may be subject to usual brokers' commissions; (b) in a winding up or dissolution of the, the claims of the PIBS holders will rank behind all other creditors of the and the claims of members holding shares (other than deferred shares) as to principal and interest; (c) the PIBS are not protected investments for the purposes of payments out of the Building Societies Investor Protection Fund; (d) interest in respect of the PIBS shall not be payable where to make payment would result in the 's capital falling below prescribed levels if the Directors of the resolve that such interest should not be paid or where the has not paid interest in respect of deposits or shares (other than deferred shares); and (e) if the does not make an interest payment in respect of PIBS in accordance with paragraph (d) above, such interest will be cancelled. 12

13 CERTAIN PROVISIONS OF THE BUILDING SOCIETIES ACT 1986 AND THE ROLE OF THE BUILDING SOCIETIES COMMISSION AMALGAMATION Section 93 of the Act permits a building society to amalgamate with one or more building societies by establishing a building society as their successor. Amalgamation requires approval by special resolutions of the members of each amalgamating society and by borrowing members' resolutions (as defined in Schedule 2 to the Act) of the borrowing members of each amalgamating society and confirmation by the Commission. The Act provides that on the date specified by the central office of the Registry of Friendly Societies (the "Central Office") all the property, rights and liabilities (which would include the PIBS) of each of the societies shall by virtue of the Act be transferred to and vested in the successor, whether or not otherwise capable of being transferred or assigned. TRANSFER OF ENGAGEMENTS Section 94 of the Act permits a building society to "transfer its engagements to any extent" to another building society which undertakes to fulfil such engagements. A transfer requires approval by special resolutions of the members of the transferor society and the transferee society, and by borrowing members' resolutions of the borrowing members of the transferor society and the transferee society. The resolutions of the transferee society however are not required if the Commission consents to the transfer proceeding by a resolution of its board of directors only. The transfer must be confirmed by the Commission. The Act provides that on the date specified by the Central Office and to the extent provided in the instrument of transfer, the property, rights and liabilities of the transferor society shall by virtue of the Act be transferred to and vested in the transferee society, whether or not otherwise capable of being transferred or assigned. In the event of a transfer of all or part of the property and/or all or some of the liabilities of the the PIBS would, pursuant to their terms, become deferred shares in the transferee society without any alteration of their terms. CONVERSION Sections 97 to 102 of the Act permit a building society to transfer the whole of its business to a company which has been specially formed by the society wholly or partly for the purpose of assuming and conducting the society's business in its place or to an existing company which is to assume and conduct the society's business in its place. The transfer must be approved by a requisite shareholders' resolution and by a borrowing members' resolution. A requisite shareholders' resolution must be passed as a special resolution on which votes have been cast (or, in certain cases, cast in favour) by a specified percentage of the members qualified to vote on a special resolution or, in certain cases, by members holding a specified percentage of the total value of shares held by members so qualified to vote. In addition the society must obtain the confirmation of the Commission to the transfer and its terms. If the Commission confirms the transfer, the Act provides that on the vesting date (as defined in the Act) all the property, rights and liabilities of the society making the transfer, whether or not capable of being transferred or assigned, shall by virtue of the Act and in accordance with transfer regulations (then in force) be transferred to and vested in the successor. Pursuant to Section 100(2)(a) of the Act, the PIBS would be converted into deposits with the successor. The terms of the PIBS provide that the deposits will be subordinated and will be applied in the subscription of perpetual subordinated bonds of the successor subject as provided therein. Where, in connection with any transfer, rights are to be conferred on members of the society to acquire shares in priority to other subscribers, the right is restricted to those members of the society who have held their shares throughout the period of two years expiring on a qualifying day specified by the society in the transfer agreement. Also, all investing members' shares (including PIBS) are, as explained above, converted into deposits with the successor. If the transfer is to a company specially formed by the society, shareholders of the society who were eligible to vote on the transfer, who are members on the qualifying day specified in the transfer agreement and who retain a deposit with the successor must be given rights to a priority liquidation distribution (as defined by the Act) should the successor be wound up. These rights are protected by the successor granting a charge over its property or undertaking. On any transfer under Sections 97 of the Act, investing members of the society who were members on the qualifying date but not entitled to vote on the transfer resolution will receive a cash bonus equal to their notional share of reserves of the society. If the transfer is to a company specially formed by the society, no other distribution of funds may be made. If the transfer is to an existing company, any distribution of funds (apart from the statutory 13

14 cash bonus referred to above) may only be made to those members of the society who have held their shares for at least two years expiring on a qualifying day specified by the society in the transfer agreement. The society may, as a result of an amalgamation, transfer of engagements or transfer of business as described above, be replaced, as the principal debtor under all or some of the PIBS, by an entity substantially different in nature from the society at present or with a substantially different capital position. In all cases the confirmation of the Commission is required before any such change can take place. GENERAL The Commission is required to have regard to the position of the PIBS holders pursuant to the provisions of Section 1(4) of the Act which requires it to promote the protection by each building society of the investments of that building society's "shareholders and depositors", for which purpose the expression "shareholders" includes PIBS holders. 14

15 NORTHERN ROCK BUILDING SOCIETY HISTORY AND DESCRIPTION The was formed on 1st July, 1965, as a result of the union of Northern Counties Permanent Building (established in 1850) and Rock Building (established in 1865). Following the transfer of engagements of the North of England Building, the will incorporate a total of 53 societies. In 1993, the was the 11th largest building society, by assets, in the United Kingdom with total consolidated assets of approximately 7.3 billion* at 31st December, Following the transfer of engagements of North of England the is expected to be the 10th largest building society in the United Kingdom with total consolidated assets of approximately 10 billion. The average number of persons employed full-time by the and its subsidiaries (together the "Group") during the year ended 31st December 1993, was 810 at its principal office, administration centres and in subsidiaries and 592 at branch offices. Persons employed in such areas on a part-time basis were 94 and 235, respectively. The average number of persons employed full time by North of England and its subsidiaries (together the "North of England Group") during the same period was 190 at its principal office and 143 at branch offices. The figure for part time staff in those areas were 42 and 112 respectively. The principal purpose of the, as stated in clause 2 of its Memorandum, is that of raising, primarily by the subscriptions of the members of the, a stock or fund for making to them advances secured on land for their residential use. CONSTITUTION The is an authorised building society within the meaning of the Act. As such, it is a mutual organisation. Its members comprise holders of investment shares in, and borrowers whose loans are secured by mortgage to, the. The is registered with the Central Office, Registered Number 703B. A share in the is not the same as a share in a company incorporated under the Companies Acts and voting power is not weighted (save in respect to voting by PIBS holders on a change of the conditions of issue) according to the number or value of shares held. As mentioned above, the has two types of members, investing members and borrowing members. In order to vote, investing members and borrowing members must satisfy certain requirements laid down by the Act and the Rules. In general, qualifying investing members each have one vote at any general meeting of the ; qualifying borrowing members are only entitled to vote in certain limited circumstances and, when so entitled, are also entitled to one vote. A PIBS holder who is an investing member otherwise than by virtue of his holding a PIBS will only have one vote in the. The Act includes provisions enabling a building society, subject to its members' approval and to the confirmation of the Commission, to convert to public limited company status. The present policy of the Board of Directors is for the to remain a mutual organisation, operating for the benefit of its members. DIRECTORS All the directors of the are of British nationality. Their business address is Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL. Further details of the directors of the appear on pages 49 to 51 of this document. In addition, on 1st June, 1994 the appointed The Hon. M.W. Ridley as a director of the. In addition to the existing directors of the, the following North of England directors will become directors of the following the transfer of engagements: Mr J.S. Ward, Sir David Chapman and Mr D.K. Wilson. Details of these directors appear on pages 78 to 79 of this document. *Note. In this document the word "billion" refers to a thousand million. 15

16 PRINCIPAL ESTABLISHMENT The address of the principal office of the is, and will remain after the transfer of engagements, Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL. The freehold of these premises is owned by the and comprises a gross measurement of approximately 139,000 square feet. A new Deeds Storage facility incorporating additional office accommodation is presently under construction at the principal office site and, when completed, this building will incorporate an additional gross measurement of approximately 47,000 square feet, the freehold of which is owned by the. BUSINESS ACTIVITIES The 's principal activity is to make advances on the security of first mortgages of residential property. At 31st December, 1993, the had advanced on mortgage approximately 6.0 billion to some 189,480 borrowers. During the year to that date new mortgage advances amounted to approximately 1.4 billion. North of England, as at 31st December, 1993, had advanced on mortgage approximately 1.2 billion to some 42,852 borrowers. New mortgage advances amounted during the year to that date to approximately 168 million. The made increased provision during the year ended 31st December, 1993 for possible future loan losses. At 31st December, 1993, arrears of more than 12 months in mortgage payments to the amounted to 36.1 million or 0.60 per cent. of residential mortgage balances. The Group's loan loss provisions totalled 28.9 million at 31st December, 1993, for residential and commercial mortgages and unsecured lending. The corresponding figures for the North of England Building were as follows: At 31st December, 1993 arrears of more than 12 months in mortgage payments to North of England amounted to 1.59 million or 0.13 per cent. of residential mortgage balances. Loan loss provisions for the North of England Group totalled 2.47 million as at 31st December, 1993 for residential and commercial mortgages. Regulations made under the Act require that at least 75 per cent. of a building society's total commercial assets (as defined in the Act) be held by way of advances to individuals that are fully secured by mortgage on land which is for their residential use. Neither the relevant regulations nor the Act permit any reduction of this percentage. The accepted a transfer of engagements from the Surrey Building with effect from 5th July, The Surrey Building had assets of 78.5 million at 31st December, 1992 and the merger provided the with an additional 5 branches and 11 main agents. The 1993 financial information in this document includes the assets of Surrey Building. During the course of 1993 and 1994, the opened four mortgage sales centres based at Southampton, Bristol, Aberdeen and St Albans. These locations are charged solely with providing mortgage lending and it is anticipated that, together with a number of other such centres to be opened in the future, these centres will contribute to the 's continued growth in the provision of mortgage finance. The has recently formed two subsidiary companies: Northern Rock Syndications Limited will participate in the commercial syndicated loan market; Northern Rock Mortgage Indemnity Company Limited will provide mortgage indemnity insurance to the. Services provided by the and, prior to the transfer of engagements, by North of England include: Insurance - The is an appointed representative of Legal and General Assurance Limited and Legal and General (Unit Trust Managers) Limited for life assurance and related investment services. Independent investment advice is provided by a subsidiary company, Northern Rock Financial Services Limited, which is an authorised independent intermediary providing financial advice on life assurance, pensions, unit trusts and personal equity plans. North of England became an appointed representative of General Accident Life in October Upon the transfer of engagements this representative arrangement will cease. North of England Financial Services Limited, a subsidiary company of North of England, arranges the provision of independent financial advice to North of England customers. Following the transfer of engagements from North of England, the business of this company may be transferred to another member of the Group. Housing - Northern Rock Homes Limited, together with its subsidiary Northern Rock Housing Trust (1985), is involved in housing development and is presently undertaking a number of residential 16

17 development projects. Homes Intown PLC is a subsidiary engaged in the provision of residential rented accommodation. North of England has three wholly-owned subsidiaries and has interests in three joint venture companies which are active in housing development primarily in conjunction with established developers. It also has a further subsidiary that provides rented accommodation. Unit Trusts - Rock Asset Management Limited and Rock Asset Management (Unit Trust) Limited offer unit trust based personal equity plans and AVC schemes. The and North of England both provide secured personal loans and an interest bearing current account product. LIQUID ASSETS Because of the nature of its business, it is necessary for a building society to hold a significant proportion of its assets in a readily realisable form. The Act provides that a building society must ensure that, of its total assets, it keeps such a proportion of them having such a composition as will at all times enable the building society to meet its liabilities as they arise. The types and maturity ranges of listed and unlisted securities in which building societies may invest are specified in regulations made under the Act. As at 31st December, 1993, the Group's liquid assets, including accrued interest, totalled approximately 1.2 billion or 15.9 per cent. of its total assets. The maximum holding of liquid assets permitted under the Act is 331/3 per cent. of total assets. The liquid assets of North of England Group totalled approximately 282 million as at 31st December, 1993 or 18.7 per cent. of its total assets. FUNDING Retail savings are the 's major source of funding. As at 31st December, 1993, the had 946,355 retail investor accounts totalling 5.2 billion which represented 71 per cent. of total liabilities and reserves. North of England, as at 31st December, 1993 had 287,169 retail investor accounts totalling 1.1 billion, which represented 76 per cent. of total liabilities and reserves. As at 31st December, 1993, non-retail funds and deposits (comprising principally time deposits, certificates of deposit, bond issues, amounts owed to banks and subordinated liabilities), excluding accrued interest, of the and its subsidiaries amounted to approximately 1.7 billion or 24.9 per cent. of shares, deposits and loans. The corresponding figures for North of England and its subsidiaries amounted to 243 million or per cent. of shares, deposits and loans. The Act does not permit a building society to raise non-retail funds and deposits in excess of 40 per cent. of its total shares, deposits and loans. OPERATING PERFORMANCE AND FINANCIAL POSITION The Group's assets amounted to approximately 7.3 billion at 31st December, 1993 an increase of 1.3 billion over 1992, representing growth of 21 per cent. Profit before tax totalled 89.3 million and profit transferred to reserves amounted to 60.3 million, the latter representing a 35 per cent. increase over the previous year. The Group's reserves stood at million or 4.3 per cent. of total assets, an increase of 0.12 per cent. on The assets of the North of England Group amounted to approximately 1.5 billion as at 31st December, 1993, an increase of 89 million over 1992, representing growth of 6,3 per cent. Profit before tax totalled 13.5 million and profit transferred to reserves amounted to 9 million, the latter representing a 19 per cent. decrease on the previous year. The reserves of the North of England Group stood at 82 million or 5.4 per cent. of total assets, an increase of 0.3 per cent. on The 's cost income ratio has continued to fall and presently stands at 35 per cent. as against 38 per cent. for the year ended 31st December, The cost income ratio of North of England, for the year ended 31st December, 1993 stood at 54 per cent. as against 48 per cent. for the year ended 31st December, The management expenses ratio of the also fell from 1.04 per cent. in 1992 to 0.86 per cent. of mean assets in The management expenses ratio of North of England over the same period increased from 1.24 per cent. to 1.25 per cent. of mean assets. Mortgage lending by the in 1993 totalled a record of approximately 1.4 billion. This increase in lending of 5 per cent. since 1992 was attained despite a difficult housing market. Mortgage lending by North of England in 1993 totalled 168 million, a decrease in lending of 42 per cent. since

18 The charge against profits in 1993 by the in respect of provisions against bad debts rose to 17.1 million representing 0.26 per cent. of mean total assets (1992, 0.24 per cent.). This increase was to cover larger than expected falls in the value of repossessed homes, more stringent application of mortgage indemnity recovery rates by insurers and to provide a prudent provision against losses on 1993 lending. The charge against profits in 1993 by North of England in respect of provisions against bad debts rose to 2 million representing 0.14 per cent. of mean total assets (1992, 0.08 per cent.). INTERIM PERFORMANCE As at 30th June, 1994, the Group's assets amounted to approximately 7.9 billion, representing growth of 8 per cent. for the first six months of Profit before tax for the six months to 30th June, 1994, totalled 61.5 million, representing an increase of more than 40 per cent. over the corresponding period in The Group's liquid assets were approximately 1.3 billion at 30th June, 1994, representing 16.4 per cent. of total assets. As at 30th June, 1994 the assets of the North of England Group totalled approximately 1.5 billion, representing growth of 0.3 per cent. for the first six months of Profit before tax for the six months to 30th June, 1994, totalled 8.2 million representing an increase of more than 6 per cent. over the corresponding period in The North of England Group's liquid assets stood at approximately 294 million at 30th June, 1994, representing 19.4 per cent. of total assets. TRANSFER OF ENGAGEMENTS Immediately prior to the transfer of engagements taking place, there will be some adjustments made to the book values attributable to certain of the assets of North of England. In the opinion of the directors of the, these adjustments will not be material in relation to the total assets of the merged after the transfer of engagements. PROSPECTS The expects that the housing and mortgage market will show, at best, moderate growth during 1994, albeit in a low interest rate environment. The Group intends to remain one of the lowest cost producers in the industry by concentrating on its core business whilst maintaining rigid cost control and expanding its assets in a highly prudential manner. By generating profitable growth, the Group intends to improve its reserve ratio (the underlying measure of financial strength) thereby providing protection for its investors. It is expected that the increased financial strength of the following the transfer of engagements of North of England, together with the benefits to members of the enhanced product range and extensive network of branch offices (which will give the improved marketing strength), will enable the to build on its success over the past few years. 18

19 (A) CAPITALISATION STATEMENTS The following table is a summary of the 's consolidated shareholders* funds and indebtedness as at the dates specified. 31st 31st 30th June, December, December, (Unaudited) (Audited) (Audited) m m m Shareholders' funds Shares 5, , ,173.0 General reserves Total shareholders' funds 6, , ,424.6 Indebtedness Amounts owed to credit institutions Time deposits Certificates of deposit Other deposits and loans Medium Term Notes 50.4 Floating Rate Notes due November 1994 (issued on 24th June, 1992) Floating Rate Notes due October 1995 (issued on 18th October, 1988) (note iii) Floating Rate Notes due 1996 (issued on 20th July, 1993) Floating Rate Notes due April 1998 (issued on 19th April, 1994) Subordinated Loan due 1999 (Ex Lancastrian B.S.) /8 per cent. Subordinated Bonds due November 2000 (issued on 28th November, 1988) Subordinated Floating Rate Notes due 2002 (issued on 5th June, 1992) Subordinated Loan due December, /8 per cent. Subordinated Bonds due March 2018 (issued on 25th March, 1993) Total indebtedness 1, , ,554.2 Total capitalisation 7, , ,978.8 Notes:- (l) The above figures include accrued interest. (ii) There has been no material change in the consolidated shareholders' funds or indebtedness of the since 30th June, (iii) At the option of the Noteholders 82 million of the Floating Rate Notes due October 1995 were redeemed on the interest payment date falling in October,

20 (B) North of England The following table is a summary of North of England's consolidated shareholders' funds and indebtedness as at the dates specified. 31st 31st December, December, (Audited) (Audited) Shareholders' funds Shares 1,135,219 1,041,765 Subscribed capital (PIBS) 19,758 19,758 General reserve 82,218 73,164 Total shareholders' funds 1,237,195 1,134,687 Indebtedness Amount owed to credit institutions 130, ,398 Other deposits and loans 98, ,883 Retail funds and deposits 23,835 19,171 Other liabilities and provisions 19,498 23,603 Total indebtedness 272, ,055 Total capitalisation 1,509,764 1,420,742 Notes:- (i) The above figures include accrued interest. (ii) Save as mentioned below, there has been no material change in the consolidated shareholders' funds or indebtedness of North of England since 31st December (iii) Immediately prior to the transfer of engagements taking place, there will be some adjustments made to the book values attributable to certain of the commercial assets of North of England. 20

21 NORTHERN ROCK INTERIM ACCOUNTS OF NORTHERN ROCK BUILDING SOCIETY GROUP Summary income and expenditure account 6 months to 6 months to Year to 31st 30th June, 30th June, December, (Unaudited) (Unaudited) (Audited) m m m Interest receivable Interest payable (204.8) (188.5) (393.9) Net interest receivable Other income and charges Management expenses (31.6) (30.0) (57.2) Provisions for loans, advances and guarantees (8.6) (6.0) (17.1) Profit before tax Tax thereon (20.4) (14.4) (29.0) Profit after tax Summary balance sheet 31st 30th June, 30th June, December, (Unaudited) (Unaudited) (Audited) m m m Assets Liquid assets 1, , ,159.8 Commercial assets 6, , ,051.1 Fixed and other assets , , ,279.4 Liabilities and reserves Retail shares and deposits 5, , ,204.6 Non-retail shares, deposits and loans 1, , ,578.6 Other liabilities Capital: General reserve Subordinated liabilities , , ,

22 NORTHERN ROCK Key performance figures 31st 30th June, 30th June, December, (Unaudited) (Unaudited) (Audited) m m m Gross lending ,436 Net retail receipts Key ratios (Unaudited) (Unaudited) (Audited) % % % Asset growth Profit after tax/mean assets Profit after tax/mean reserves Liquidity Gross capital Free capital

23 NORTH OF ENGLAND INTERIM ACCOUNTS OF NORTH OF ENGLAND BUILDING SOCIETY GROUP Summary income and expenditure account Year to 6 months to 6 months to 31st 30th June, 30th June, December, (Unaudited) (Unaudited) (Audited) Interest receivable 53,582 57, ,596 Interest payable (40,733) (43,483) (82,709) Net interest receivable 12,849 14,122 25,887 Other income and charges 4,454 3,254 6,904 17,303 17,376 32,791 Administrative expenses (8,762) (8,902) (18,265) Operating profit 8,541 8,474 14,526 Provisions for bad and doubtful debts ,015 8,214 7,687 12,511 Exceptional profit on disposal of tangible fixed assets 1,003 8,214 7,687 13,514 Tax on profit on ordinary activities (2,234) (2,554) (4,460) Profit for the financial year 5,980 5,133 9,054 Summary balance sheet 31st 30th June, 30th June, December, (Unaudited) (Unaudited) (Audited) Assets Liquid assets 293, , ,368 Commercial assets 1,198,614 1,194,562 1,208,352 Fixed assets 16,438 7,417 14,088 Other assets 5,659 2,421 4,956 Total assets 1,514,420 1,485,267 1,509,764 Liabilities and reserves Retail funds and deposits 1,149,628 1,106,441 1,141,378 Non-retail funds and deposits 234, , ,912 Other liabilities 22,216 25,715 19,498 Capital and reserves 107,956 98, ,976 Total liabilities, capital and reserves 1,514,420 1,485,267 1,509,764 23

24 NORTH OF ENGLAND Key performance figures 31st 30th June, 30th June, December, (Unaudited) (Unaudited) (Audited) Gross lending 60,960 77, ,373 Net retail receipts (12,614) 28,344 42,746 Key ratios (Unaudited) (Unaudited) (Audited) % % % Asset growth Profit after tax/mean assets 0.79* 0.71* 0.62 Profit after tax/mean reserves 14.04* 13.56* Liquidity Gross capital Free capital *6 month ratios annualised. 24

25 NORTHERN ROCK FINANCIAL STATEMENTS OF NORTHERN ROCK BUILDING SOCIETY AND GROUP Thefinancialstatements set out on pages 25 to 44 have been extracted from audited accounts of the Group. Certain of the information presented below has been reclassified in accordance with amendments made as a result of the implementation of Financial Reporting Standard No.3. CONSOLIDATED INCOME AND EXPENDITURE ACCOUNTS for the years ended 31st December Note m m m m m m Interest receivable: On secured advances On other lending On debt securities On other liquid assets Interest payable: 3 On retail shares and deposits On non-retail shares, deposits and loans On subordinated liabilities Net interest receivable Other income and charges: 4 Commissions receivable Commissions payable (0.6) (0.5) (0.1) Other operating income Other operating charges (0.3) Administrative expenses: 4,7 Wages and salaries Social security costs Other pension costs Total staff costs Depreciation of tangible fixed assets Other expenses Provisions for loans, advances and guarantees Loss on discontinuation of operation 8 (5.7) Profit on ordinary activities before tax (including nil (1992 loss 5.7m; 1991 loss l.8m) from discontinued operations. Profits from continuing operations were 89.3m ( m; m)) Tax on profit on ordinary activities Profit after tax There were no gains recognised in the year which were not reflected in the profit for each of the respective financial years. There were no differences between reported profits and historical cost profits. 25

26 SOCIETY INCOME AND EXPENDITURE ACCOUNTS for the years ended 31st December Note m m m m m m Interest receivable: On secured advances On other lending On debt securities On other liquid assets Interest payable: 3 On retail shares and deposits On non-retail shares, deposits and loans On subordinated liabilities Net interest receivable Other income and charges: 4 Commissions receivable Commissions payable (0.6) (0.5) (0.1) Other operating income Administrative expenses: 4,7 Wages and salaries Social security costs Other pension costs Total staff costs Depreciation of tangible fixed assets Other expenses Provisions for loans, advances and guarantees Loss on discontinuation of operation 8 (8.6) Profit on ordinary activities before tax (including nil (1992 loss 8.6m; 1991 nil) from discontinued operations, profits from continuing operations were 88.5m ( m; m)) Tax on profit on ordinary activities Profit after tax There were no gains recognised in the year which were not reflected in the profit for each of the respective financial years. There were no differences between reported profits and historical cost profits. 26

27 NORTHERN ROCK CONSOLIDATED BALANCE SHEETS As at 31st December Note ASSETS m m m m m m Liquid assets: 1,10 Cash in hand and balances with the Bank of England Loans and advances to credit institutions Debt securities: Issued by public bodies Issued by other borrowers Other , Commercial assets: 12,13 Advances secured on residential property 5, , ,552.9 Other advances secured on land Other commercial assets: Unsecured loans Residential properties held for rental 1.5 1,4 1.2 Residential properties held for development: Completed Work in progress Investments in associated bodies , , ,703.7 Fixed assets: Tangible assets; 14 Land and buildings Assets in the course of construction 0.4 Equipment, fixtures, fittings and vehicles Other assets Prepayments and accrued income Total assets 7, , ,414.8 LIABILITIES AND RESERVES Shares, deposits and loans: Retail shares and deposits: 16 Shares 5, , ,039.5 Deposits , , ,065.1 Non-retail shares, deposits and loans: 17 Amounts owed to credit institutions Debt securities in issue: Certificates of deposit Fixed and floating rate notes Other deposits , , ,050.8 Other liabilities: 18 Income tax Corporation tax Other creditors Accruals and deferred income Provisions for liabilities and charges: Deferred taxation 1, Subordinated liabilities Total liabilities 6, , ,211.9 General reserve Total liabilities and reserves 7, , ,414.8 Memorandum items Commitments 22 1,

28 NORTHERN ROCK SOCIETY BALANCE SHEETS As at 31st December Note m m m m m m Liquid assets: 1,10 Cash in hand and balances with the Bank of England Loans and advances to credit institutions Debt securities: Issued by public bodies Issued by other borrowers Other , Commercial assets: 12,13 Advances secured on residential property 5, , ,552.9 Other advances secured on land Other commercial assets: Unsecured loans Residential properties held for rental Investments in associated bodies , , ,710.0 Fixed assets: Tangible assets: 14 Land and buildings Equipment, fixtures, fittings and vehicles Other assets Prepayments and accrued income Total assets 7, , ,416.7 LIABILITIES AND RESERVES Shares, deposits and loans: Retail shares and deposits: 16 Shares 5, , ,039.5 Deposits , , ,065.1 Non-retail shares, deposits and loans: 17 Amounts owed to credit institutions Debt securities in issue: Certificates of deposit Fixed and floating rate notes Other deposits , , ,053.7 Other liabilities: 18 Income tax Corporation tax Other creditors Accruals and deferred income Provisions for liabilities and charges: Deferred taxation 1, Subordinated liabilities Total liabilities 6, , ,212.5 General reserve Total liabilities and reserves 7, , ,416.7 Memorandum kerns. Commitments 22 1,

29 NORTHERN ROCK CONSOLIDATED STATEMENT OF SOURCE AND APPLICATION OF FUNDS For the year ended 31st December m m m Source of funds: Increase in free capital Advances and loans repaid by borrowers Net receipts of retail shares and deposits Net receipts of non-retail shares, deposits and loans Retail and non-retail funds acquired on transfer of engagements Interest credited to accounts Decrease in other commercial assets 0.5 Other items (5.5) Total source of funds 1, , ,304.6 Application of funds: Increase in liquid assets Liquid assets acquired on transfer of engagements Advances and loans made to borrowers 1, , ,179.0 Increase in other commercial assets Advances and loans acquired on transfer of engagements Other items Total application of funds 1, , ,304.6 INCREASE IN FREE CAPITAL Source of funds: Profit on ordinary activities after tax Adjustment for items not involving the movement of funds: Goodwill written back on discontinuation of business 3.2 Depreciation Profit on disposal of premises (1.0) (0.5) Profit on disposal of fixed assets (0.1) (0.1) (0.1) Increase/Decrease in general provisions for losses on advances and loans 1.4 (3.3) 0.8 Other 2.0 (0.1) Funds generated from operations Funds from other sources: Disposal of tangible fixed assets Free capital acquired on transfer of engagements Issue of subordinated loan capital Total funds generated Application of funds: Purchase of tangible fixed assets (8.4) (9.0) (12.9) Provision for goodwill (0.1) (8.4) (9.0) (13.0) Increase in free capital

30 NORTHERN ROCK 1. ACCOUNTING POLICIES NOTES TO THE FINANCIAL STATEMENTS Accounting convention The accounts have been prepared under the historical cost convention and in accordance with applicable Accounting Standards. Basis of consolidation The consolidated accounts include the results of the and its subsidiary undertakings, all of which have accounting periods ending 31st December. Unless otherwise stated, the acquisition method of accounting has been adopted. Investments in associated bodies are stated in the 's balance sheet at cost less provisions for goodwill and losses. Taxation Corporation tax is charged in the accounts based on the profit for the year as adjusted for taxation purposes. Deferred taxation Deferred taxation is provided on the liability method on all material timing differences in the treatment of items for accounts purposes and for tax purposes to the extent that it is likely that such taxation will crystallize in the foreseeable future. Fixed assets and depreciation Depreciation is provided in order to write down fixed assets, other than freehold land, to their estimated realisable value on a straight line basis over their anticipated useful lives as follows: Freehold buildings See below Leasehold property Over the period of the lease up to 50 years Office equipment, fixtures and fittings 5 to 10 years Computer equipment 4 to 7 years Motor vehicles 4 years It is Group policy to maintain its premises to a high standard, the costs of maintenance being charged to the income and expenditure account. Consequently the directors consider the lives of these properties to be so long and estimated residual value, based on prices prevailing at the time of acquisition or subsequent valuation, is so high that there is no significant annual depreciation other than on leasehold interests with less than 50 years to run. Leased assets Rentals payable under operating leases are charged to administrative expenses as incurred over the lease term. Investments Listed investments are stated at cost together with accrued interest to the balance sheet date, adjusted to exclude accrued interest at the date of purchase. A similar adjustment is made on realisation. Where the adjusted purchase price differs from the nominal value, the premium or discount is amortised or released on a straight line basis over the period to maturity. Unlisted investments are stated at purchase cost which is determined from the yield to maturity of the investment. Pension costs The Group's contributions to its pension scheme are charged to the income and expenditure account with the objective of spreading the cost over the employees' working lives within the Group. Variations from the regular cost are spread over the expected remaining service lives of current employees in the scheme. Costs are based upon actuarial advice following the most recent valuation of the fund. Provisions for losses on advances and loans Provisions for losses are based on assessments of the losses which are anticipated on outstanding balances at the year end and are calculated in accordance with guidance issued by the Building Societies Commission. Specific provision is made against all loans where losses are expected to crystallize. General provision is made against the mortgage book to the extent to which further losses may be expected. 30

31 NORTHERN ROCK Repairs and renewals Repairs and renewals are charged to administrative expenses in the year in which the expenditure is incurred. Goodwill Purchases of goodwill arising on acquisitions by subsidiary undertakings are funded through intercompany loan accounts. Each acquisition is considered separately to determine the appropriate treatment of goodwill. In these accounts, goodwill has been written off in the accounts of subsidiary undertakings and a corresponding provision has been made against the intercompany balance in the accounts of the. The write off of goodwill in the consolidated accounts and the corresponding provision for intercompany balances in the accounts have been charged direct to reserves. On disposal of subsidiary undertakings, goodwill previously written off is written back to reserves and charged through the income and expenditure account. Developments in progress Developments in progress are valued at the lower of cost plus attributable development fees and net realisable value. Full provision is made for all foreseeable losses. 2. INTEREST RECEIVABLE Consolidated On other lending comprises: m m m m m m To associated bodies Other loans On debt securities comprises: Interest receivable Net surplus on realisation of listed (0.3) (0.3) investments INTEREST PAYABLE Consolidated On non-retail funds includes the following: m m m m m m Interest payable to associated bodies OTHER INCOME AND EXPENDITURE ITEMS Consolidated Other income includes: m m m m m m Net surplus on sale of premises Administrative expenses include the following costs: Hire of equipment Auditors' remuneration

32 NORTHERN ROCK 5. PENSION COMMITMENTS The Group operates a defined benefit scheme for full-time employees, the assets of which are held in a separate trustee-administered fund. The scheme was assessed by R. Watson & Sons, consulting actuaries, as at 5th April, 1991, using the projected unit method. The principal actuarial assumptions adopted in that valuation were that, over the long term, the rate of return on future investments will exceed pension increases bya1/2 per cent. per annum and that interest rates will exceed increases in earnings by 2 per cent. per annum. At 5th April, 1991, the market value of the fund was 21.5 million. The actuarial valuation of that fund represented 95 per cent. of the benefits that had accrued to members after allowing for expected future increases in earnings. The is committed to making additional payments over a three year period to meet this deficit by making contributions of 15.7 per cent. of pensionable earnings until 31st December, Members' contributions remain at 5 per cent. of pensionable earnings. The deficit is being charged to the income and expenditure account over a thirteen year period, being the average remaining service lives of employees. The contributions which would be required to meet the deficit over this period would be 13 per cent. of pensionable earnings resulting in a prepayment included in other assets in the balance sheet of 0.6 million ( million). 6. STAFF NUMBERS The average number of persons employed by the Group (including executive directors) was as follows; Consolidated Full time Part time Full time Part time Principal office and administration offices Branch offices ,402 1,266 1, ,361 1,224 1, DIRECTORS' EMOLUMENTS For services as a director For other services Emoluments for services as a director includes directors' or past directors' pensions of 32,692 ( ,189, ,394). Emoluments for other services includes pension contributions of 48,525 ( ,023, ,670) The emoluments of the chairmen, excluding pension contributions, were: R H Dickinson Viscount Ridley The emoluments of the highest paid director, excluding pension contributions, were:

33 NORTHERN ROCK The number of directors whose emoluments, excluding pension contributions, fell within the following ranges were: Consolidated and ,001-10, ,001-15, ,001-20, ,001-25, ,001-35, ,001-45, ,001-65, , , , , , , , , , , , , , ,000 1 There were no significant contracts between the or its subsidiaries and any of the directors of the during the year. 8. LOSS ON DISCONTINUATION OF OPERATION Consolidated Cm m m m m m Disposal of estate agency business The accounts have been prepared under Financial Reporting Standard 3 (FRS3), Reporting Financial Performance. To comply with this standard, the costs related to the disposal of estate agency business treated as an extraordinary item in 1992 have been restated as a loss on discontinuation of operation, and the tax credit of 0.1 million relating to this item has been included in the tax charge (Note 9). 9. TAX ON PROFIT ON ORDINARY ACTIVITIES The corporation tax charge for the year comprises: Consolidated m m m m m m Current taxation at 33% Increase/(decrease) in deferred taxation (0.7) (0.7)

34 NORTHERN ROCK 10. LIQUID ASSETS Liquid assets stated on the basis of their remaining maturity are as follows: Consolidated m m m m Loans and advances to credit institutions: Accrued interest Repayable on demand In not more than three months In more than three months but not more than one year Debt securities: Accrued interest In not more than one year In more than one year but not more than five years In more than five years Analysis of debt securities Consolidated and m m Transferable securities: Listed on a recognised investment exchange Unlisted Market value of listed debt securities Held as financial fixed assets: At maturity value Unamortised premiums Unamortised discounts (0.8) (0.2) Adjusted cost The securities held as liquid assets are held with the intention of use on a continuing basis in the 's activities and are classified as financial fixed assets. 34

35 NORTHERN ROCK Movements during the year of transferable securities are as follows: Consolidated and m Adjusted Cost: At 1st January, Additions 1,915.5 Disposals (1,681.0) Premiums (net of discounts) charged during the year (2.4) At 31st December, At 31st December, PROVISIONS FOR LOANS, ADVANCES AND GUARANTEES Provisions for losses on advances and loans has been made as follows: Advances Advances secured on secured on Loans to residential commercial Unsecured associated property property lending bodies Total m m m m m Consolidated At 1st January, 1993: Specific provision General provision Provisions arising from transfer of engagements: Specific provision General provision Income and expenditure account: Increase in provisions during the year: Specific provision General provision Amounts written off during the year: Specific provision At 31st December, 1993: Specific provision General provision At 1st January, 1993: Specific provision General provision

36 NORTHERN ROCK Advances Advances secured on secured on Loans to residential commercial Unsecured associated property property lending bodies Total Provisions arising from transfer or engagements: m m m m m Specific provision General provision Income and expenditure account: Increase in provisions during the year: Specific provision General provision Amounts written off during the year: Specific provision (0.1) 11.6 At 31st December, 1993: Specific provision General provision Interest has been suspended on non-performing loans as follows: Advances Advances secured on secured on residential commercial property property Total m m m Interest suspended at 1st January, Movement in suspended interest during the year: Interest suspended Amounts written off (5.1) (0.6) (5.7) Interest suspended at 31st December Consolidated and Advances on which interest has been suspended totalled: m m Before provisions After provisions

37 NORTHERN ROCK 12. COMMERCIAL ASSETS - MATURITY ANALYSIS The maturity of advances secured on residential property, other advances secured on land and unsecured loans, from the date of the balance sheet is as follows: Consolidated and m m Repayable on demand In not more than three months In more than three months but not more than one year In more than one year but not more than five years In more than five years 5, , , ,983.6 Less: provisions , , INVESTMENTS IN ASSOCIATED BODIES Consolidated m m m m Shares held in associated bodies Loans to associated bodies Loans to Shares in other associated associated Group undertakings bodies m m Cost: At 1st January, New advances made during the year Repayments received (0.3) At 31st December,

38 NORTHERN ROCK Shares in Loans to Shares in Loans to Shares in Loans to other other subsidiary subsidiary associated associated associated associated undertakings undertakings undertakings undertakings bodies bodies m m m m m m Cost: At 1st January, New advances made during the year 3.2 Repayments received (0.6) (0.2) At 31st December, At 31st December, The shares in the indirect associated body Northern Rock Housing Trust (1985) are held by Northern Rock Homes Limited. The has membership rights in Funds Transfer Sharing Limited (FTS), a private company registered in England limited by guarantee, which provides the and its members with automated teller machine facilities throughout the United Kingdom via the LINK shared network. The had interests in the following associated bodies at 31st December, 1993, all of which are constituted under the Companies Act 1985, registered in England and operate in the United Kingdom. Relationship Shares Interest of Nature of to the held the business Subsidiary undertaking (unlimited): Northern Rock Housing Trust Indirect Ordinary 100% Housing development (1985) 1 shares Subsidiary undertakings (limited by shares): Northern Rock Homes Limited Direct Ordinary 100% Housing development 1 shares Rock Asset Management Direct Ordinary 100% Marketing and Limited 1 shares administration of unit trust based products Rock Asset Management (Unit Direct Ordinary 100% Management of a Unit Trust) Limited 1 shares Trust Rock Asset Management Direct Ordinary 100% Holding of investments (Nominees) Limited 1 shares on behalf of personal equity plan investors and pension scheme trustees Northern Rock Financial Direct Ordinary 100% Independent financial Services Limited 1 shares intermediary Northern Rock Estates Limited Direct Ordinary 100% Building development 1 shares 38

39 NORTHERN ROCK Relationship Shares Interest of Nature of to the held the business Other associated bodies: Regency Care Homes Limited Direct Ordinary 50% Provision of residential 1 shares accommodation to the elderly Homes Intown PLC Direct 25p 4.762% Provision of residential Founders' assured tenancies under shares the Business Expansion Scheme Sligos Payments Systems Direct Ordinary 1.79% Provision of services in International Limited 1 shares electronic payment systems VISA UK Limited Direct Ordinary 0.4% Assisting in the 1 shares provision of electronic payment services The loss after tax and aggregate capital and reserves as shown by the latest set of accounts of Regency Care Homes Limited are 0.1 million and a deficit of 0.6 million respectively. 14. FIXED ASSETS Assets Equipment, Land and buildings in the fixtures, Long Short course of fittings & Freehold leasehold leasehold construction vehicles Total Consolidated m m m m m m Cost: At 1st January, Transfer of engagements Additions Disposals (0.3) (0.1) (0.1) (0.7) (1.2) At 31st December, Depreciation and amortisation: At 1st January, Transfer of engagements Charged in year Adjustment arising on disposals (0.7) (0.7) At 31st December, Net book amount: At 31st December, At 31st December,

40 NORTHERN ROCK Assets Equipment, Land and buildings in the fixtures, Long Short course of fittings & Freehold leasehold leasehold construction vehicles Total m m m m m m Cost: At 1st January, Transfer of engagements Additions Disposals (0.3) (0.1) (0.1) (0.6) (1.1) At 31st December, Depreciation and amortisation: At 1st January, Transfer of engagements Charged in year Adjustment arising on disposals (0.5) (0.5) At 31st December, Net book amount: At 31st December, At 31st December, Consolidated m m m m Land and buildings occupied by the Group/ for its own activities: OTHER ASSETS Consolidated m m m m Due within one year Due after more than one year Included in the above are: Amounts due from mortgage insurance guarantors

41 NORTHERN ROCK 16. RETAIL SHARES AND DEPOSITS Retail shares and deposits are repayable in the ordinary course of business as follows: Consolidated and Shares m m Accrued interest On demand 3, ,888.5 In not more than three months 1, ,255.7 In more than one year but not more than five years , ,173.0 Deposits Accrued interest On demand NON-RETAIL SHARES, DEPOSITS AND LOANS Non-retail shares, deposits and loans are repayable in the ordinary course of business as follows: Consolidated Amounts owed to credit institutions: m m m m Accrued interest In not more than three months In more than three months but not more than one year In more than one year but not more than five years In more than five years Debt securities in issue: Accrued interest In not more than three months In more than three months but not more than one year In more than one year but not more than five years Other deposits: Accrued interest On demand In not more than three months In more than three months but not more than one year In more than one year but not more than five years

42 NORTHERN ROCK 18. OTHER LIABILITIES Consolidated Other liabilities comprise: Amounts falling due within one year: m m m m Income tax on interest Corporation tax Other taxation Social security Other creditors PROVISIONS FOR LIABILITIES AND CHARGES Consolidated Provisions for liabilities and charges comprise: Deferred taxation: m m m m At 1st January Deferral for the year At 31st December The amounts provided relate to: Excess of capital allowances over depreciation (long term) Accrued interest (short term) Other timing differences (short term) (2.0) (1.3) (2.0) (1.3) SUBORDINATED LIABILITIES Consolidated and m m Subordinated loan due /8 per cent. Subordinated bonds due Subordinated floating rate notes due per cent. Subordinated loan /8 per cent. Subordinated bonds due Accrued Interest The subordinated loan due 1999 is not redeemable in the ordinary course of business before 28th December, The113/8per cent. Subordinated bonds due 2000 are not redeemable in the ordinary course of business before 28th November,

43 NORTHERN ROCK The subordinated floating rate notes due 2002 are not redeemable in the ordinary course of business before June The per cent. subordinated loan 2016 is repayable in five equal annual instalments from 2012 to The103/8 per cent. bonds due 2018 were issued during the year in order to increase the 's capital base and to provide capital backing for future developments. Subordinated liabilities are ranked equally between and within issues. 21. GENERAL RESERVE Consolidated m m m m At 1st January Goodwill written back on disposal of business Net reserves acquired on transfer of engagements Profit for the financial year At 31st December GUARANTEES AND OTHER FINANCIAL COMMITMENTS (i) The has an obligation under the Building Societies Act 1986 to honour the financial commitments of its subsidiaries and associated bodies linked by resolution insofar as those bodies are unable to discharge them out of their own assets. (ii) The has a contingent liability in respect of contributions to the Building Societies Investor Protection Fund provided for by the Building Societies Act (ih) Capital commitments at 31st December in respect of authorised expenditure were as follows: Consolidated m m m m Contracted for Authorised but not contracted for (iv) Leasing commitments at 3lst December in respect of annual commitments under operating leases, relating to land, buildings and equipment are as follows: Consolidated m m m m Land and buildings: Leases which expire: Within 1 year in 2-5 years Over 5 years

44 NORTHERN ROCK Consolidated m m m m Other operating leases: Leases which expire: in 2-5 years Unmatured swaps at 31st December Consolidated and m m Exchange rate contracts Underlying principal amount Risk weighted amount Replacement cost Interest rate contracts Underlying principal amount 1, Risk weighted amount Replacement cost DIRECTORS' LOANS AND TRANSACTIONS At the end of the financial year the aggregate amount outstanding in relation to loans from and other transactions and arrangements with the (or any relevant subsidiary of the ) described in section 65 of the Act (other than those to which section 65(5) and (6) of the Act applies) and the number of persons for whom such loans, transactions and arrangements were made is as follows: Aggregate amount 1.6 million Number of persons 19 The maintains a register under section 68 of the Act of all such loans, transactions and arrangements and requisite particulars from it are available for inspection. 24. NET ASSETS ACQUIRED ON TRANSFER OF ENGAGEMENTS The following net assets were acquired on transfer of engagements during the year: m m Liquid assets 10.9 Reserves acquired (see note 21) 0.8 Commercial assets 56.6 Fixed and other assets 1.3 Shares, deposits and loans (66.8) Other liabilities (1.2)

45 NORTHERN ROCK DIRECTORS' REPORT AND ANNUAL BUSINESS STATEMENT OF THE SOCIETY The 's Directors' Report for the year ended 31st December, 1993 and Annual Business Statement for the year ended 31st December, 1993 appear on pages 45 to 47 and 48 to 53 respectively and are included in this document in compliance with Section 80 of the Act. It should be noted that references to page numbers in the Director's Report are to pages in the 's Report and Accounts 1993 and not to pages in this document. DIRECTORS' REPORT For the year ended 31st December, 1993 The directors are pleased to present their statutory report on the business of Northern Rock Building Group together with the audited accounts for the year ended 31st December, BUSINESS OBJECTIVES OF THE SOCIETY AND ITS ASSOCIATED BODIES The principal purpose of the Group is to provide housing finance, savings and investment services and a range of related financial and personal banking services, backed by the excellent security afforded by its strong capital position and supported by its commitment to top quality customer service. This intention is clearly stated in our primary operating policy statement: "Northern Rock is determined to remain a successful and independent building society. We will seek profitable growth by offering a competitive range of financial services grouped mainly around home ownership". REVIEW OF THE DEVELOPMENT OF THE GROUP'S BUSINESS IN THE YEAR ENDED 31ST DECEMBER, 1993 The Group achieved another highly successful year in 1993, with growth in profits transferred to reserves of 35 per cent. to 60.3 million and asset growth of 21 per cent. Net receipts of retail shares and deposits reached 738 million, which was a substantially larger share of the overall savings market than our asset size would indicate that we could expect. These funds were attracted in a low interest rate market with increased competition from equity-based products and indicate again the strength of our investment product portfolio and the confidence which investors have in Northern Rock. Mortgage lending reached record levels of 1,436 million, despite the continuing subdued state of the mortgage market in Our competitively priced mix of fixed and variable rate mortgage products has enabled us to write almost twice the level of business which we could expect for a society of our size, whilst continuing to improve the quality of our mortgage assets. Provisions for bad debts continued to rise during 1993 due mainly to larger than expected falls in the value of repossessed homes, more stringent application of mortgage indemnity recovery rates by insurers, and a prudent increase in general provisions to meet losses on 1993 lending which have not yet arisen but which may occur in the future. The levels of losses incurred by the continue to compare favourably with other mortgage lenders. We believe that, unless there is an unexpected deterioration in the housing market, our provisions for losses have reached their peak. In July 1993 the accepted a transfer of engagements of Surrey Building. This merger extended our branch coverage in the south east of England, as well as increasing mortgage assets by 56.6 million and retail funds by 66.5 million. The Directors confirm that in their opinion no activities were carried out by the, which were outside its legal powers. 45

46 NORTHERN ROCK RESULTS FOR THE YEAR The profit before tax on the Group's ordinary activities reached 89.3 million, an increase of 29 per cent. over In order to comply with a newly introduced accounting standard, pre-tax profits for 1992 have been restated to reflect the loss on disposal of the Group's estate agency business which was treated as an extraordinary item last year. CAPITAL At 31st December, 1993 the gross capital of the and its relevant subsidiaries totalled 447 million, including 134 million of subordinated liabilities. This represented 6.66 per cent. of share, deposit and loan liabilities. Free capital totalled 389 million, or 5.80 per cent. of share, deposit and loan liabilities. TOTAL ASSETS The Group's assets at 31st December, 1993 totalled 7,279 million, an increase of 1,262 million or 21 per cent. for the year. LIQUID ASSETS Liquid assets, in the form of cash and securities, at 31st December, 1993 were 1,160 million. This represents 15.9 per cent. of total assets, a sum more than adequate to meet the Group's cash requirements. In addition, the market value of the Group's quoted liquid assets showed a surplus of 19.4 million above their amortised cost of acquisition at 31st December, COMMERCIAL ASSETS The made record mortgage advances of 1,436 million during the year. Mortgage balances amounted to 6,040 million at 31st December, 1993, an increase of 22 per cent. over At the end of the year 5,293 mortgage accounts were twelve or more months in arrears and the arrears on these accounts totalled 36.1 million. Although provisions for mortgage losses have increased in 1993, security remains sound for the most part and with some modest signs of improvement in the housing market we firmly believe that we have reached the peak of provisions against possible mortgage losses. The quality of the mortgage book remains very high. Our competitive pricing policy and strict lending criteria enable us to continue to write high volumes of business to low risk customers. This policy will continue to prevail during We continued to expand our commercial lending portfolio in a controlled and prudent manner, increasing the book to a value of 289 million at 31st December, 1993, an increase of 71 million or 32 per cent. during the year. FUNDING Retail investors' balances grew to 5,205 million in 1993, an increase of 24 per cent. during the year. Net retail receipts totalled 738 million. Non-retail balances increased by 9 per cent. to 1,579 million, and together with subordinated liabilities represented 24.8 per cent. of total share, deposit and loan liabilities. FIXED ASSETS Land and buildings, which are included in the balance sheet at cost less amortisation where applicable, amounted to 51.7 million at 31st December, In the opinion of the Directors, based on valuations carried out by the 's qualified Chartered Surveyors, the total market value of these assets was 37.6 million. It is not the Group's policy to provide for short term fluctuations in such market values, whether positive or negative and the Directors have adhered to this policy in these accounts. Acquisitions of freeholds of branches and other premises amounted to 3.2 million. Details of changes in fixed assets are provided in note 14 to the accounts. 46

47 NORTHERN ROCK EVENTS SINCE THE YEAR END The Directors consider that there have been no events which have occurred from 1st January, 1994 to the date of this report which are likely to have a material effect on the financial position of the or the Group as disclosed in the accounts. FUTURE DEVELOPMENTS The Directors intend to continue their successful strategy of profitable growth, and when appropriate intend to issue Permanent Interest Bearing Shares during 1994, in order to enhance the capital strength of the to provide even more security to members. DISABLED PERSONS The Group is committed to equal employment opportunities for everyone, including the disabled, and treats any applicant solely on his or her ability to do the job. In line with this policy, the Group will wherever possible retain employees who become disabled, either in the same job or, with the aid of training and provisions for special needs, in a suitable alternative position. The Group is also proud of its record for developing the skills and potential of disabled employees to the full, and according to individual abilities, offering them equality of training and promotion opportunities. EMPLOYEE INVOLVEMENT The Group recognises the vital importance of good communication and relations with staff and regards this as an essential element of managerial responsibility at all levels. In addition to a staff magazine published bi-monthly, the issues a weekly news bulletin to all staff which provides information about a wide range of items of topical interest. This is supplemented by regular updates of operating plans, results, products and services. Formal consultation and negotiation with representatives of the Group's Staff Association, a branch of the Banking, Insurance and Finance Union, are well established and two staff representatives are Trustees of the 's Pension and Assurance Scheme. Improvements in communication are considered regularly with a view to ensuring that staff have a full understanding of the Group's operations and how they can participate to the full in the future development of the business. The Directors believe that the many initiatives taken in order to involve staff in the present and future success of the business play an important role in improving the Group's business performance and they wish to record their appreciation of the notable efforts made by staff and management towards another very successful year. DIRECTORS The names of the Directors of the at 31st December, 1993 are shown on pages 38 to 39 of the Annual Business Statement. Mr Kevin Charles Southwood resigned from the Board on 26th March, Mr Robert Frederick Bennett was appointed as Finance Director on 1st November, At the end of the financial year, no director had any interest in shares in, or debentures of, any associated body of the other than nominee shareholdings held on behalf of the. AUDITORS The auditors, Price Waterhouse, have expressed their willingness to continue in office. By order of the Board C Jobe, Secretary 22nd February,

48 NORTHERN ROCK 1. Statutory ratios and percentages ANNUAL BUSINESS STATEMENT For the year ended 31st December, 1993 Statutory limit % % Part 1 A. Non-retail shares, deposits and loans as a percentage of shares, deposits and loans - including subordinated liabilities excluding subordinated liabilities 23.3 n/a B. Deposits and loans as a percentage of shares, deposits and loans C. Advances secured on residential property as a percentage of total commercial assets 95.0 n/a D. Advances secured on land other than residential property as a percentage of total commercial assets 4.8 n/a E. Commercial assets, other than advances secured on land, as a percentage of total commercial assets E Commercial assets, other than advances secured on residential property, as a percentage of total commercial assets Part 2 Non-retail shares, deposits and loans as used in the calculation of ratio A represent: m Amounts owed to credit institutions Debt securities in issue: Certificates of deposit Fixed and floating rate notes Other deposits Subordinated liabilities ,699.4 Shares, deposits and loans as used in the calculation of ratios A and B represent: m Non-retail funds (as above) 1,699.4 Retail deposits 46.5 Shares 5, ,39.6 Deposits and loans as used in the calculation of ratio B represent: m Retail deposits 46.5 Amounts owed to credit institutions Debt securities in issue: Certificates of deposit Fixed and floating rate notes Other deposits Subordinated liabilities The above figures exclude accrued interest. 1,

49 NORTHERN ROCK Total commercial assets as used in the calculation of ratios C, D, E and F represent: m Advances secured on residential property 5,751.1 Advances secured on other property Other commercial assets (see below) ,051.1 Other commercial assets as used in the calculation of ratio E represent: m Residential properties held for rental 1.5 Residential properties held for development 8.5 Unsecured loans 1.0 Investment in associated bodies 0.4 Commercial assets, other than advances secured on residential property, as used in the calculation of ratio F represent: m Advances secured on land other than residential property Other commercial assets (as above) Other percentages % % A. As a percentage of share, deposit and loan liabilities: (i) Gross capital (ii) Free capital B. As a percentage of total assets: Liquid assets C. Profit after tax as a percentage of: (i) Mean reserves (ii) Mean total assets The above percentages have been calculated on the basis of the relevant figures shown in the consolidated accounts of Northern Rock Building and relevant subsidiary undertakings as shown on pages 18 and 20 of this report. Share, deposit and loan liabilities represent the total of retail and non-retail shares, deposits and loans excluding accrued interest. Mean figures represent the average of the relevant figures as shown in the balance sheets at 31st December, 1992 and Profit after taxation represents profit for the financial year. 3. Information relating to directors and other officers Directors Date of Date of Name Birth Appointment Occupation Robert Henry Dickinson, DL, MA 12/5/34 1/7/71 Solicitor Chairman Chairman of the Board Policy and Remuneration Committees Member of the Board Credit and Treasury Committees Trustee of the 's Pension and Assurance Scheme Other Directorships Barclays Bank (NE District) Limited. The Carr-Ellison Estates. Cross House Buildings Limited. Grainger Trust PLC and subsidiary companies. High Gosforth Park PLC Kavli Limited. New Abbey Properties 49

50 NORTHERN ROCK Limited. Northern Investors Company PLC. Tyne Tees Television Holdings PLC. Yorkshire-Tyne Tees Television Holdings plc. Reg Vardy PLC. Northern Venture Managers Limited. Date of Date of Name Birth Appointment Occupation Sir John Buchanan Riddell, Bt, CVO, DL, 3/1/34 1/8/90 Deputy MA, CA Chairman of Deputy Chairman Credit Suisse Member of the Board Policy, Treasury and First Boston Remuneration Committees Limited Other Directorships CS First Boston Limited. CS First Boston Equities (Europe) Limited. CS First Boston Trustees Limited. CS First Boston (Gilts) Limited. A G Carrick Limited. Howick Trustees Limited. Northumbrian Water Group plc. SANE Charitable Company Limited. The Swaziland Settlement Limited. The National Tenants Resource Centre Limited. William Reay Atkinson, CB, BA, FBCS 15/3/26 1/7/88 Company Member of the Board Policy, Audit and Director Remuneration Committees Other Directorships English Estates Corporation. Belasis Hall Technology Park Limited. Maryport Developments Limited. University of Northumbria at Newcastle. Robert Frederick Bennett, FCA, ACMA, IPFA 30/5/47 1/11/93 Building Member of the Board Policy, Treasury and Audit Committees Executive Director Other Directorships Rock Asset Management Limited. Rock Asset Management (Unit Trust) Limited. Rock Asset Management (Nominees) Limited. John James Fenwick, DL, MA 9/8/32 1/6/84 Company Member of the Board Policy and Director Remuneration Committees Trustee of the 's Pension and Assurance Scheme Other Directorships Fenwick Limited. J T Dove Pensions Trust Limited. Acon Investments Limited. Leo Peter Finn, BA, FCIB 13/7/38 1/1/89 Building Member of the Board Policy, Audit, Credit and Treasury Committees Executive Director Other Directorships Northern Rock Estates Limited. Northern Rock Financial Services Limited. Northern Rock Homes Limited. Northern Rock Housing Trust (1985). Rock Asset Management Limited. Rock Asset Management (Unit Trust) Limited. Rock Asset Management (Nominees) Limited. Northern Coalfields Property Company Limited. Homes Intown PLC. Regency Care Homes Limited. Community Housing Initiatives Limited. Tyneside Economic Development Company Limited. Philip Richard Milnes Harbottle, MA, FCA 19/3/34 1/8/88 Chartered Chairman of the Board Audit Committee Accountant Member of the Board Policy and Credit Committees Other Directorships Tyne & Wear Building Preservation Trust Limited. Minster Sound Radio plc. Black Sheep Brewery plc. Tyne & Wear Foundation Limited. Willan Charitable Trust Nominees Limited. Yuill Group Limited. Durham County Waste Management Company Limited. Sandra Lourenco Limited. 50

51 NORTHERN ROCK Date of Date of Name Birth Appointment Occupation The Lord Howick of Glendale 30/12/37 1/11/87 Company Chairman of the Board Credit Committee Director and Member of the Board Audit, Treasury and former Remuneration Committees Merchant Banker Other Directorships Howick Trustees Limited. Lovaine Trust Company Limited. The Baring Foundation. Hubert Robin Hutton, OBE, MA 22/4/33 1/1/86 Company Chairman of the Board Treasury Director Committee Other Directorships Investment Management Regulatory Organisation Limited. Homes Intown PLC. Singer and Freidlander Holdings Limited. Christopher Jonathan Pumphrey, TD, DL, 2/11/33 1/6/91 Former MA Stockbroker Member of the Board Audit Committee Chairman of the Trustees of the 's Pension and Assurance Scheme Other Directorships Rock Farms Limited. The Viscount Ridley, KG, TD, DCL, Hon 29/7/25 1/9/62 Company RICS Director Member of the Board Policy Committee Other Directorships College Valley Estates Limited. Samares Investments Limited. Sir George Russell, CBE, D.Eng., BA 25/10/35 1/4/85 Company Member of the Board Treasury and Director Remuneration Committees Other Directorships Marley plc and subsidiary companies. Independent Television Commission. Alcan Aluminium Limited. 3i Group plc. Taylor Woodrow plc. James Christopher Sharp, CBE, MA, FCIB, 24/12/39 1/4/85 Building CBIM Member of the Board Policy, Audit and Managing Treasury Committees Director Trustee of the 's Pension and Assurance Scheme Other Directorships Tyneside TEC Limited. NHBC Building Control Services Limited. National House Building Council. North Housing Association Limited. North Housing Limited. North Housing Trust Limited. Building Societies Ombudsman Company Limited. Homes Intown PLC. Personal Investment Authority Limited. Tyne and Wear Development Corporation. Newcastle Theatre Royal Limited. NOTE: No director bad a service contract with the at 31st December, Documents may be served on any of the directors at Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL. 51

52 NORTHERN ROCK. Officers (all of whom are employed as Building Executives) Other Directorships A J Applegarth, BA Northern Rock Financial Rock Asset Management (Unit Services Limited Trust) Limited Rock Asset Management Rock Asset Management Limited (Nominees) Limited D F Baker, BSc, FCIB None C Blakey, BSc, Dip. TP, MRTPI Northern Rock Homes Limited North British Housing Limited Northern Rock Housing Trust Northern Coalfields Property (1985) Company Limited Community Housing Initiatives Limited K M Currie None C Jobe, BA Northern Rock Holdings Northern Rock Estates Limited Limited and subsidiary Regency Care Homes Limited companies Northern Rock Mortgage Lancastrian Financial Services Services Limited Limited D Johnson, FCII, DMS, MBIM Northern Rock Financial Rock Asset Management (Unit Services Limited Trust) Limited Rock Asset Management Rock Asset Management Limited (Nominees) Limited D H Noble, BSc, MBCS, MBIM Northern Rock Financial Northumbria Coalition Against Services Limited Crime Limited Rock Asset Management Funds Transfer Sharing Limited Limited LINK Interchange Network Rock Asset Management (Unit Limited Trust) Limited Rock Asset Management (Nominees) Limited C Taylor, LLB Northern Rock Financial Rock Asset Management (Unit Services Limited Trust) Limited Northern Rock Mortgage Rock Asset Management Services Limited (Nominees) Limited Rock Asset Management Northern Rock Holdings Limited Limited and subsidiary Lancastrian Financial Services companies Limited I Wallace, ACA None J W Watson, MA, FCA None Other Executives J A Armstrong, MBIM None K R Barry, BA, FCIB None A P Dewar, BA, FCIB, FIPM None K Dunwoodie, MBCS Funds Transfer Sharing Limited G J M English, JP, BA, MIDPM None I Fox, FCIB, FBIM, MCIM LINK Interchange Network VISA UK Limited Limited 52

53 NORTHERN ROCK 4. Average rates on the major categories of interest bearing assets and liabilities Average Interest Average balance earned/ yield/ outstanding paid rate m m % Assets: Liquid assets 1, Secured advances 5, Liabilities: Retail shares and deposits 4, Non-retail shares, deposits and loans 1, The balances above represent average quarter end balances during the year, excluding accrued interest. 5. Associated bodies not carrying on business The holds an interest in the following associated bodies, which are incorporated under the Companies Act 1985, registered in England and limited by shares {see note 13 to the accounts): Relationship Shares Interest of to the held the - Northern Rock Mortgage Services Limited Direct Ordinary 100% 1 shares - Lancastrian Propertypoint Limited Direct Ordinary 100% 1 shares - Lancastrian Financial Services Limited Direct Ordinary 100% 1 shares - Community Housing Initiatives Limited Direct Ordinary 50% 1 shares 6. Information about new activities The has not, either itself or through a subsidiary undertaking, exercised any additional adopted powers set out in its Memorandum for the first time during the financial year ended 31st December,

54 NORTHERN ROCK AUDITORS' REPORT TO THE MEMBERS OF THE SOCIETY There appears below the text of the Auditors' Report to the members of the, as printed in the 's Annual Report and Accounts 1993 which is included in this document in compliance with Section 80 of the Act. It should be noted that references to page numbers in the Auditors' Report are to pages in the 's Annual Report and Accounts 1993 and not to pages in this document. AUDITORS' REPORT TO THE MEMBERS OF NORTHERN ROCK BUILDING SOCIETY We have audited the accounts on pages 18 to 35 which have been prepared under the historical cost convention and the accounting policies set out on pages 23 and 24 and have examined the annual business statement, other than the details of the directors and officers upon which we are not required to report, and the directors' report set out on pages 36 to 41 and pages 1$ to 16 respectively. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As described on page 17 the 's directors are responsible for the preparation of the accounts and other information which we have examined. It is our responsibility to form an independent opinion on the accounts and other information and to report our opinion to you. BASIS OF OPINION ON THE ACCOUNTS We conducted our audit of the accounts on pages 18 to 35 in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the 's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts. OPINION ON THE ACCOUNTS In our opinion the accounts give a true and fair view of the state of affairs of the and of the Group at 31st December, 1993, of the income and expenditure of the and of the Group for the year then ended, and of the manner in which the business of the Group was financed and in which the Group's financial resources were used during the year. OTHER INFORMATION We have examined the annual business statement on pages 36 to 41 other than the details of directors and officers upon which we are not required to report. In our opinion the information which we have examined gives a true representation of these matters referred to therein. We have examined the directors' report on pages 15 to 16. In our opinion the information given therein is consistent with the accounting records and the accounts. In our opinion the accounts, the annual business statement and the directors' report have each been prepared so as to conform to the requirements of Part VIII of the Building Societies Act 1986 and the regulations thereunder. Price Waterhouse, 22nd February, 1994 Chartered Accountants Newcastle upon Tyne and Registered Auditors 54

55 NORTH OF ENGLAND FINANCIAL STATEMENTS OF NORTH OF ENGLAND AND THE NORTH OF ENGLAND GROUP The financial statements set out on pages 55 to 73 have been extracted from audited accounts of the North of England Group. Certain of the information presented below has been reclassified in accordance with amendments made as a result of the implementation of Financial Reporting Standard No.3. CONSOLIDATED INCOME AND EXPENDITURE ACCOUNTS OF NORTH OF ENGLAND GROUP for the years ended 31st December Notes Interest receivable 2 108, , ,707 Interest payable 3 82, , ,999 Net interest receivable 25,887 26,727 24,708 Income from associated bodies 25 Other income and charges 4 6,904 7,374 4,980 32,791 34,101 29,713 Administrative expenses 5 18,265 16,393 13,853 14,526 17,708 15,860 Provisions for bad and doubtful debts 11 2,015 1, ,511 16,660 15,426 Exceptional profit on disposal of tangible fixed assets. 14 1,003 Profit on ordinary activities before tax 13,514 16,660 15,426 Tax on profit on ordinary activities 8 4,460 5,544 4,989 Profit for financial year 21 9,054 11,116 10,437 There were no recognised gains or losses in the year, other than those included in the income and expenditure account. 55

56 NORTH OF ENGLAND NORTH OF ENGLAND INCOME AND EXPENDITURE ACCOUNTS for the years ended 31st December Note Interest receivable 2 109, , ,707 Interest payable 3 82, , ,999 Net interest receivable 26,721 27,361 24,708 Other income and charges 4 4,999 5,877 4,342 31,720 33,238 29,050 Administrative expenses 5 17,566 15,349 13,000 14,154 17,889 16,050 Provisions for bad and doubtful debts 11 2,082 1, ,072 16,657 15,439 Exceptional profit on disposal of tangible fixed assets 14 1,003 Profit on ordinary activities before tax 13,075 16,657 15,439 Tax on profit on ordinary activities 8 4,114 5,599 5,042 Profit for financial year 21 8,961 11,058 10,397 There were no recognised gains or losses in the year, other than those included in the income and expenditure account. 56

57 NORTH OF ENGLAND CONSOLIDATED BALANCE SHEETS OF NORTH OF ENGLAND GROUP As at 31st December Note ASSETS Liquid assets: 9 282, , ,416 Commercial assets: Advances secured on residential property 10 1,028,911 1,001, ,602 Other advances secured on land , , ,184 Other commercial assets 12 33,979 35,683 32,274 1,208,352 1,174, ,060 Tangible fixed assets 14 14,088 7,260 7,269 Other assets 2,885 1,376 1,975 Prepayments and accrued income 15 2, Total assets 1,509,764 1,420,742 1,224,302 LIABILITIES AND RESERVES Shares and deposits: Retail funds and deposits: 16 1,141,378 1,057, ,115 Non-retail funds and deposits , , ,308 1,388,290 1,304,217 1,135,423 Other liabilities 18 16,948 22,441 26,126 Accruals and deferred income 2, Provisions for liabilities and charges Subscribed capital 20 19,758 19,758 General reserve 21 82,218 73,164 62,048 Total liabilities and reserves 1,509,764 1,420,742 1,224,302 Memorandum items: Commitments 23 3,000 2,000 2,000 57

58 NORTH OF ENGLAND BALANCE SHEETS OF NORTH OF ENGLAND As at 31st December Note ASSETS Liquid assets: 9 282, , ,354 Commercial assets: Advances secured on residential property 10 1,028,911 1,001, ,602 Other advances secured on land , , ,184 Other commercial assets 12 38,928 28,760 21,492 1,213,301 1,167, ,278 Tangible fixed assets 14 5,812 7,004 6,999 Other assets 2, ,378 Prepayments and accrued income 15 2, Total assets 1,505,964 1,412,960 1,212,378 LIABILITIES AND RESERVES Shares and deposits: Retail funds and deposits 16 1,141,378 1,057, ,115 Non-retail funds and deposits , , ,308 1,388,290 1,304,217 1,135,423 Other liabilities 18 13,364 14,260 14,358 Accruals and deferred income 2,490 1, Provisions for liabilities and charges Subscribed capital 20 19,758 19,758 General reserve 21 82,062 73,101 62,043 Total liabilities and reserves 1,505,964 1,412,960 1,212,378 Memorandum items: Commitments 23 3,000 2,000 2,000 58

59 NORTH OF ENGLAND CONSOLIDATED STATEMENT OF SOURCE AND APPLICATION OF FUNDS FOR THE NORTH OF ENGLAND GROUP For the years ended 31st December SOURCE OF FUNDS: Increase in free capital (see below) 2,226 31,158 9,272 Advances and loans repaid by borrowers 132, , ,948 Increase in retail funds and deposits 83, , ,538 Increase in non-retail funds and deposits ,272 46,073 Decrease in other commercial assets 1,704 9,734 Total source of funds 220, , ,565 APPLICATION OF FUNDS: Increase in liquid assets 44,967 9,985 32,661 Advances and loans made to borrowers 168, , ,904 Increase in other commercial assets 3,409 Other items 7,123 2,884 Total application of funds 220, , ,565 INCREASE IN FREE CAPITAL Source of funds: Profit on ordinary activities after tax 9,054 11,116 10,437 Adjustment for items not involving the movement of funds: Depreciation and other amounts written off tangible fixed assets 1,251 1, Exceptional profit on disposal of tangible fixed assets (note 14) (1,003) Loss/(profit) on disposal of other tangible fixed assets 36 (23) (10) 284 1, Increase/(decrease) in general provisions for loans and advances 275 (25) Funds generated from operations 9,338 12,545 11,392 Funds from other sources: Disposal of tangible fixed assets 2, Issue of subscribed capital 19,758 11,933 32,694 11,480 Application of funds: Purchase of tangible fixed assets 9,707 1,536 2,009 Goodwill written off 199 Increase in free capital 2,226 31,158 9,272 The movement in specific provisions for losses on loans and advances is included under the heading "Advances and loans repaid by borrowers". 59

60 NORTH OF ENGLAND NOTES TO THE FINANCIAL STATEMENTS OF THE NORTH OF ENGLAND GROUP 1. ACCOUNTING POLICIES The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group and 's accounts. Basis of preparation The accounts have been prepared in accordance with applicable accounting standards, under the historical cost accounting rules and in accordance with The Building Societies (Accounts and Related Provisions) Regulations In order to ensure comparability some corresponding amounts have been restated to reflect the effect of these new regulations and other changes arising from the implementation of Financial Reporting Standard 3, Reporting Financial Performance. Basis of consolidation The Group income and expenditure account and balance sheet incorporate the accounts of the and its subsidiary and associated companies which are made up to 31st December. Uniform accounting policies are applied throughout the Group. Goodwill Goodwill arising on acquisition is fully written off against reserves in the year of acquisition. Corporation tax Corporation tax is charged in the accounts on the excess of income over expenditure for the year, as adjusted for tax purposes. Deferred tax Provision is made, using the liability method, for tax which is deferred as a result of items included in these accounts being dealt with in a different period for tax purposes only to the extent that, in the opinion of the Directors, it is likely that such tax will become payable in the foreseeable future. Tangible fixed assets and depreciation The cost of additions and major improvements to office premises, equipment and motor vehicles is capitalised. The Group does not provide for depreciation of freehold property and, insofar as nothing has been written off buildings, the Group has not complied with Statement of Standard Accounting Practice No. 12 because it is the Group's policy to maintain its premises to the highest standard in addition to which any depreciation charge would not, in the opinion of the Directors, materially affect the Group's accounts. The cost of leaseholds is written off over the period of the respective leases, up to a maximum period of 100 years. Other fixed assets are written off over their estimated useful lives as follows: Equipment Fixtures and fittings Vehicles 5 years 10 years 5 years Subscribed capital Costs incurred on the issue of subscribed capital are deducted from the proceeds of the issue in accordance with Financial Reporting Standard 4, Capital Instruments. Development properties Properties held for development are stated at the lower of cost and net realisable value. Cost comprises land purchase cost, subsequent building works and loan interest. Liquid assets Debt securities intended for use on a continuing basis in the 's activities are classified as financial fixed assets and are stated at cost together with accrued interest to the balance sheet date. Premiums and discounts arising on the purchase of financial fixed assets are amortised over the period to the maturity date of the security. Any amounts so amortised are charged/credited to the income and expenditure account for the relevant financial years. Where there is a permanent diminution in value of a financial fixed asset a provision is made so as to write down the cost of the security to its recoverable amount. Other liquid assets are stated at the lower of cost and net realisable value, together with accrued interest to the balance sheet date. 60

61 NORTH OF ENGLAND Provisions for loans and advances Provisions are made to reduce the value of advances and loans to the amount that the Directors consider is likely ultimately to be received. Throughout the year and at the year end individual assessments are made of all advances and loans on properties which are in possession, or in arrears by three months or more. Specific provision is made against those advances and loans which are considered to be impaired. In considering the specific provision for impaired loans, account is taken of any discount which may be needed against the value of the property at the balance sheet date to agree a sale within three months of that date, the amounts recoverable under mortgage indemnity policies and anticipated realisation costs. The Directors recognise that not all accounts in arrears will result in possession and apply a factor based on recent experience to reflect this probability when calculating the provision for accounts in arrears. A general provision is made against those advances in arrears but not in possession, which have not been specifically identified as impaired, but where the 's experience and the general economic climate would indicate that losses may ultimately be realised. Interest in respect of all loans is credited to the income and expenditure account as it becomes receivable, except in respect of all advances where the property has been taken into possession and where the collectability of the interest is subject to significant doubt. Such interest is suspended. Commercial assets in the balance sheet are shown net of provisions, specific and general, and net of the balance in the interest suspense account. The charge to the income and expenditure account comprises the increase in the provision together with losses written off in the year. Pension costs The charge for pensions is calculated using actuarial valuation methods which reflect the long term costs of providing pensions. The regular cost charged to the income and expenditure account is calculated so as to spread the cost of pensions over employees' working lives with the. 2. INTEREST RECEIVABLE Group On secured advances 90, , ,236 90, , ,236 On other lending to associated 1,574 1,973 1,944 2,408 2,607 1,944 bodies On debt securities Interest and other income 2,640 3,197 3,394 2,640 3,197 3,394 Profits net of losses 275 1, , On other liquid assets Interest and other income 13,997 19,090 19,670 13,997 19,090 19, , , , , , ,707 Interest on secured advances, as shown above, has been reduced by l.54m (1992 l.68m, 1991 l.llm) representing interest suspended on non-performing loans in accordance with the 's accounting policy. Movements in the suspended interest account are as follows: 61

62 NORTH OF ENGLAND Group & At 1st January 1, Interest now considered recoverable (12) Interest written off during the year (842) (279) (1,001) Interest suspended in the year 1,555 1,677 1,108 At 31st December 2,206 1, Advances on which interest has been suspended Before provision 19,848 19,227 After provision 18,345 18,245 The amount of interest suspended as at 31st December has been deducted from the appropriate commercial assets in the balance sheets. 3. INTEREST PAYABLE Group On retail funds and deposits 63,96$ 85,166 90,251 63,965 85,166 90,251 On non-retail funds and deposits. 16,219 24,938 21,748 16,219 24,938 21,748 On subscribed capital 2,525 1,263 2,525 1,263 82, , ,999 82, , , OTHER INCOME AND CHARGES Group Commissions receivable 3,997 4,597 3,670 3,872 4,508 3,622 Commissions payable (115) (84) (134) (115) (98) (165) Other operating income 3,022 2,861 1,444 1,242 1, ,904 7,374 4,980 4,999 5,877 4,342 Other operating income includes the results of the 's development subsidiaries. 5. ADMINISTRATIVE EXPENSES Group Staff costs (note 6) 6,968 6,899 5,773 6,574 6,483 5,404 Depreciation of tangible fixed assets 1,287 1, ,190 1, Auditors' remuneration Other expenses 9,939 8,271 7,034 9,745 7,711 6,598 18,265 16,393 13,853 17,566 15,349 13,000 62

63 NORTH OF ENGLAND Included in other expenses for the year ended 31st December, 1993 is an exceptional item amounting to 1,563,000 in respect of a provision for rectification costs as a result of the financial services review referred to in the annual report. 6. STAFF NUMBERS AND COSTS The average number of persons employed (including executive directors) during the year was as follows: No. No. No. No. No. No. Principal office Full time Part time Branch and estate agency offices Fulltime Part time The aggregate costs of these persons were as follows: Wages and salaries 5,908 5,910 4,944 5,561 5,538 4,611 Social security costs Other pension costs ,968 6,899 5,773 6,574 6,483 5, REMUNERATION OF AND TRANSACTIONS WITH DIRECTORS Remuneration of Directors Directors' emoluments Services as Directors of the Services in connection with the management of the Group Pension scheme contributions for other services Past Director's pension for other services Individual Directors' emoluments (excluding pension contributions) Chairman Highest paid Director

64 NORTH OF ENGLAND The number of all the Directors whose emoluments (excluding pension contributions) fell within the following ranges were: Consolidated and , ,001-10, ,001-15, ,001-20, ,001-25, ,001-30, ,001-35, ,001-40, ,001-55, ,001-90, , , , , , , , ,000 1 Directors' loans and transactions At 31st December, 1993 there were outstanding mortgage loans granted in the ordinary course of business to eight Directors and their connected persons, amounting in aggregate to 457,006. A register is maintained at the head office of the, under Section 68 of the Building Societies Act 1986, which shows details of all loans and transactions with Directors and their connected persons. A statement of the appropriate details contained in the Register, for the financial year ended 31st December, 1993, will be available for inspection at the head office for a period of 15 days up to and including the annual general meeting. 8. TAXATION Group The taxation charge for the year comprises Corporation tax at 33% ( % %) 4,729 5,228 4,812 4,250 5,622 4,937 Deferred tax (note 19) (269) (136) (23) 105 Share of associated companies' taxation. 8 4,460 5,544 4,989 4,114 5,599 5,042 The taxation charge for the year ended 31st December, 1993 includes a deduction of 516,000 from corporation tax in respect of the exceptional provision for rectification costs referred to in note 5. The exceptional profit arising on the disposal of tangible fixed assets referred to in note 14 gives rise to no taxation charge. 64

65 NORTH OF ENGLAND 9. LIQUID ASSETS Liquid assets comprise: Group Cash in hand and balances with the Bank of England. 2,260 2,353 2,182 2,232 Loans and advances to credit institutions 232, , , ,593 Debt securities Issued by other borrowers 33,162 28,335 33,162 28,335 Other 14,737 19,120 14,737 19, , , , ,280 Repayable from the date of the balance sheet in the ordinary course of business as follows: Group and Loans and advances to credit institutions Accrued interest 1,950 3,149 Repayable on demand 52,963 34,205 In not more than three months 121,046 90,239 In more than three months but not more than one year 54,250 59,000 In more than one year but not more than five years 2,000 1, , ,593 Debt securities Accrued interest In not more than one year 33,000 28,004 33,162 28,335 Analysis of debt securities Debt securities represent listed and unlisted transferable securities. The Directors of the consider that the primary purpose of holding securities is prudential. Debt securities held as liquid assets are held with the intention of use on a continuing basis in the 's activities and are classified as "financial fixed asets". Movements during the year of transferable securities held as financial fixed assets, excluding accrued interest, are analysed as follows: Cost and net book value 000 At 1st January, ,004 Additions 1,922,094 Disposals (1,917,098) At 31st December, , COMMERCIAL ASSETS MATURITY ANALYSIS The maturity of advances secured on residential property and other advances secured on land from the date of the balance sheet is as follows: 65

66 NORTH OF ENGLAND Repayable on demand 3,628 3,820 In not more than three months 13,802 12,670 In more than three months but not more than one year 47,406 43,611 In more than one year but not more than five years 97, ,111 In more than five years 1,014, ,089 1,176,846 1,140,301 Less provisions (note 11) (2,473) (1,841) 1,174,373 1,138,460 The maturity analysis comprises Class 1 1,028,911 1,001,362 Class 2 145, ,098 1,174,373 1,138, PROVISION FOR LOSSES Provision against commercial assets has been made as follows: Group & Group Group Advances Residential secured on Other property land commercial assets Total Total At 1st January, 1993: General provision Specific provision ,291 2, , ,841 2,737 Income and expenditure account: Charge for the year: General provision Specific provision 1, ,704 1,771 1, ,704 1,771 Adjustments to provisions for bad and doubtful debts: General provision Specific provision Amounts written off during year: General provision Specific provision (988) (395) (897) (1,383) (2,280) (988) (395) (897) (1,383) (2,280) At 31st December, 1993: General provision Specific provision 1, ,923 1,989 1,428 1, ,473 2,539 66

67 NORTH OF ENGLAND 12. OTHER COMMERCIAL ASSETS Group Investment in associated bodies (note 13) Shares in associated bodies 7, Loans to associated bodies 15,581 16,651 31,269 28,601 Residential properties held for rental Residential properties held for development Completed 4,357 3,918 Work in progress 13,559 15,009 33,979 35,683 38,928 28, INVESTMENT IN ASSOCIATED BODIES Group Investments in participating interests in associated bodies 000 Loans to associated bodies Costs At 1st January, ,651 Additions 5,947 Repayments received (7,017) At 31st December, ,581 Investments in subsidiary undertakings 000 Shares in associated bodies Cost At 1st January, Additions 7,500 At 31st December, ,659 67

68 NORTH OF ENGLAND Investments in participating Investments in interests in subsidiary associated undertakings bodies Total Loans to associated bodies Cost At 1st January, ,846 16,651 29,497 Additions 13,189 5,947 19,136 Repayment received (10,281) (7,017) (17,298) At 31st December, ,754 15,581 31,335 Provisions At 1st January, Charge for year Amounts waived during year (897) (897) At 31st December, Net book value At 31st December, ,688 15,581 31,269 At 31st December, ,950 16,651 28,601 The holds the following interests in associated bodies: Country of Class of registration Major activities shares held Interest Craghead Properties Ltd England Housing provision Ordinary 1 shares 100% Dunelmian Homes Ltd England Housing provision Ordinary 1 shares 100% F&NE Ltd England Housing development Ordinary 1 shares 50% F&NE (1990) Ltd England Housing development Ordinary 1 shares 50% Meadowvale Properties Ltd Scotland Housing development Ordinary 1 shares 100% MNE Ltd England Housing development Ordinary 1 shares 33% North of England Estate Agents Ltd England support Ordinary 1 shares 100% operations North of England Financial Services Ltd England Financial services Ordinary 1 shares 100% North of England Homeowner Services Ltd England Housing development Ordinary 1 shares 100% North of England Property Estate agency, surveys Services Ltd England & valuations Ordinary 1 shares 100% SMNE Ltd England Housing development Ordinary 1 shares 100% On 25th November, 1993 the Group acquired the share capital of Craghead Properties Ltd. This has been accounted for using the acquisition method of accounting. The above subsidiary and associated bodies operate in the United Kingdom and the interests are held directly by the, except in respect of MNE Ltd, where the interest is held by SMNE Ltd, and Craghead Properties Ltd, where the interest is held by Dunelmian Homes Ltd. The has membership rights in Funds Transfer Sharing Ltd, a private company registered in England limited by guarantee, which, through a service contract with Nexus Payment Systems Ltd, provides the and its customers with automated teller machine facilities throughout the United Kingdom via the LINK shared network. 68

69 NORTH OF ENGLAND 14. TANGIBLE FIXED ASSETS Equipment fixtures Land & & buildings fittings Vehicles Total Group Cost: At 1st January, ,164 9, ,042 Additions 8,160 1, ,707 Disposals (1,582) (63) (188) (1,833) Transfers (39) (39) At 31st December, ,703 10, ,877 Depreciation: At 1st January, , ,782 Charged in year 78 1, ,251 Disposals (85) (29) (130) (244) At 31st December, , ,789 Net book value: At 31st December, ,236 3, ,088 At 31st December, ,690 3, ,260 Cost: At 1st January, ,086 9, ,690 Additions 54 1, ,584 Disposals (1,582) (57) (172) (1,811) Transfers (39) (39) At 31st December, ,519 10, ,424 Depeciation: At 1st January, , ,686 Charged in year 30 1, ,162 Disposals (85) (28) (123) (236) At 31st December, , ,612 Net book value: At 31st December, ,115 3, ,812 At 31st December, ,627 3, ,004 69

70 NORTH OK ENGLAND The net book value of land and buildings comprises: Group Freehold 1,863 2,918 1,863 2,918 Long leasehold 8, Short leasehold ,236 3,690 2,115 3,627 Land and buildings occupied by the Group/ for its own activities: Group At 31st December 9,824 3,342 1,703 3,279 The exceptional profit on disposal of tangible fixed assets of 1,003,000 is in respect of the disposal of the 's head ofice referred to earlier in the annual report. 15. PREPAYMENTS AND ACCRUED INCOME Group Due within one year Due after more than one year Accrued interest on financial instrument 1,437 1,437 2, , RETAIL FUNDS AND DEPOSITS Retail funds and deposits comprise and are repayable from the date of the balance sheet in the ordinary course of business as follows: Group and Shares Deposits Total At 31st December, 1993 Accrued interest 26, ,946 On demand 1,083,520 23,391 1,106,911 In not more than three months In more than three months but not more than one year In more than one year but not more than five years 7,280 7,280 1,117,543 23,835 1,141,378 At 31st December, 1992 Accrued interest 31, ,641 On demand 1,007,022 18,556 1,025,578 In not more than three months In more than three months but not more than one year ,038,466 19,171 1,057,637 70

71 NORTH OF ENGLAND 17. NON-RETAIL FUNDS AND DEPOSITS Non-retail funds and deposits comprise and are repayable from the date of the balance sheet in the ordinary course of business as follows: Group and Amounts owed to credit Other institutions deposits Shares Total At 31st December, 1993 Accrued interest 1,748 1, ,703 Repayable on demand 3,785 17,265 21,050 In not more than three months 40,000 52,716 92,716 In more than three months but not more than one year 20,000 40,443 60,443 In more than one year but not more than five years 69,000 69, ,748 98,488 17, ,912 At 31st December, 1992 Accrued interest 2,248 3, ,701 Repayable on demand 2,304 3,193 5,497 In not more than three months 15,750 67,312 83,062 In more than three months but not more than one year 34,400 51,920 86,320 In more than one year but not more than five years 66,000 66, , ,883 3, , OTHER LIABILITIES Group Income tax 7,030 8,082 7,030 8,082 Corporation tax 4,475 4,902 4,040 4,881 Other tax and social security Other creditors 5,264 9,443 2,132 1,297 16,948 22,441 13,364 14,260 Group other creditors include 2,750,000 in respect of a payment for land owed by a subsidiary company (1992 8,445,000 of which 2,945,000 was due after more than one year). 19. PROVISIONS FOR LIABILITIES AND CHARGES Group Deferred taxation at 33% ( %) At 1st January, Amount (released)/provided during year (269) 316 (136) (23) At 31st December,

72 NORTH OF ENGLAND The amount provided for deferred taxation represents the full potential liability and is set out below: Group Excess of capital allowances over depreciation Other timing differences SUBSCRIBED CAPITAL Group /8% Sterling Permanent Interest Bearing Shares 19,758 19,758 19,758 19,758 Permanent Interest Bearing Shares are stated at issue proceeds less issue costs. The borrowing is for an indeterminate period and is only repayable in the event of the winding up of the. The shares were issued for general funding purposes. 21. GENERAL RESERVE Group At 1st January, ,164 62,048 73,101 62,043 Profit for financial year 9,054 11,116 8,961 11,058 At 31st December, ,218 73,164 82,062 73, GUARANTEES AND OTHER FINANCIAL COMMITMENTS Building Societies Investor Protection Fund The has a contingent liability in respect of contributions to the Building Societies Investor Protection Fund provided under the Building Societies Act Subsidiary and associated bodies The is obliged under the Building Societies Act 1986 to discharge the liabilities of its subsidiary companies and certain other associated bodies insofar as they are unable to discharge the liabilities out of their own assets. Capital commitments Capital commitments at 31st December, for which no provision has been made in the accounts, were as follows: Group Contracted, but not provided for 2, Authorised, but not contracted for 2,678 4,000 2,678 4,000 72

73 NORTH OF ENGLAND Interest rate contracts Interest rate contracts help to protect the income of the from adverse movements in market rates when providing non-traditional products such as fixed rate mortgages and investments linked to a stock exchange index. The information below is intended to summarise and quantify the extent of the 's involvement in the use of such contracts and the associated risk. At the year end, the notional principal amounts of interest rate contracts, together with their replacement cost and risk weighted amount were: Group and Notional principal amount 218, ,603 Replacement cost 595 Risk weighted amount The notional principal amount is the total of the amount of assets or liabilities which each interest rate contract covers. The replacement cost is the amount it would cost the to replace the contracts on similar terms, but taking into account interest rates prevailing at the balance sheet date. Those contracts with a positive value are aggregated to give the replacement cost and those with a negative value are ignored. Under building society solvency ratio principles for the calculation of risk associated with interest rate contracts, the notional principal amounts of the contracts are converted to credit risk equivalents by applying specified credit conversion factors and adding the replacement cost. The resulting figures are then risk weighted according to the nature of the counterparty to produce the risk weighted amount. 23. MEMORANDUM ITEMS Group and Commitments Relating to the At 31st December 3,000 2,000 The commitments relate to irrevocable undrawn loan facilities to a building society and a local authority at the year end. 24. PENSION SCHEME The operates a pension scheme for the majority of its employees providing benefits based on final pensionable pay. The assets of the scheme are held separately from the in a trustee administered fund. Contributions to the scheme are charged to the income and expenditure account so as to spread the cost of pensions over employees' working lives with the. The contributions are determined by a qualified actuary on the basis of triennial valuations using the projected unit method. The most recent triennial valuation was at 1st January, The assumptions which have the most significant effect on the results of the valuation are those relating to the rate of return on investments and rates of increase in salaries and pensions. It was assumed that the investment return would average 9 per cent. per annum, that increases in general salary levels would approximate to 7 per cent. per annum, and that present and future pensions would increase at the rate of 5 per cent. per annum. The most recent actuarial review at 1st January, 1993 showed that the market value of the scheme's assets was 4,520,000 and that the actuarial value of those assets represented 88 per cent. of the benefits that had accrued to members, after allowing for expected future increases in earnings. The contributions of the and employees are 15 per cent. and 5 per cent. of earnings respectively. 73

74 NORTH OF ENGLAND DIRECTORS' REPORT AND ANNUAL BUSINESS STATEMENT OF THE NORTH OF ENGLAND BUILDING SOCIETY The North of England Building 's Directors' Report for the year ended 31st December, 1993 and Annual Business Statement for the year ended 31st December, 1993 appear on pages 74 to 76 and 77 to 80 respectively and are included in this document in compliance with Section 80 of the Act. It should be noted that references to page numbers in the Directors' Report are to pages in the North of England Building 's Report and Accounts 1993 and not to pages in this document. DIRECTORS' REPORT The Directors have pleasure in presenting their annual report and accounts and the annual business statement of the, its subsidiaries and associated companies for the year ended 31st December, BUSINESS OBJECTIVES AND ACTIVITIES Two basic objectives remain at the core of the 's business and form the foundation for all our operations: To provide the assurance of complete security and competitive returns for our savers and investors. To offer our borrowers an accessible and affordable means of acquiring their own homes. Consistent with these objectives and with our operating philosophy, the and its subsidiaries (the Group) provide an integrated range of housing and personal financial services to the public. The Directors consider that no activities carried on during the year were outside the powers of the. BUSINESS REVIEW AND FUTURE DEVELOPMENTS The Group's business and its future prospects are reviewed by the Chairman and Group Chief Executive on pages 2 to 16. RESULTS FOR THE YEAR Assets At 31st December, 1993 total Group assets were 1, million (1992 1, million), an increase of 6.27 per cent. in the year. Liquid assets stood at million representing per cent. of total assets. Details of movements in liquid assets treated as financial fixed assets are given in note 9 to the accounts and reflect the active management of liquidity by the. During the year, the main changes to tangible fixed assets were the acquisition of a new corporate headquarters and the disposal of the current head office. In addition investment was made in a new mainframe computer and a communications network. Other movements in tangible fixed assets during the year are detailed in note 14 to the accounts. Profit and Capital In 1993 the Group achieved a pre-tax profit of million, a decrease of per cent. on the previous year. Profit after tax of 9.05 million was transferred to general reserve. At the end of the year the Group's gross capital (general reserve and subscribed capital) was million, being 7.51 per cent. ( per cent.) of total share and deposit liabilities, while free capital (gross capital and general loss provision less fixed assets) was million, being 6.51 per cent. ( per cent.) of total share and deposit liabilities. Lending Gross residential and commercial mortgage lending was million and our commercial assets now total 1, million. 74

75 NORTH OF ENGLAND Of the 's 42,852 mortgage borrowers at 31st December, 1993 there were 235 mortgages where payments were 12 or more months in arrears. The total amount of these arrears was 1.59 million, representing only 0.13 per cent. of mortgage balances. At 31st December, 1993 provisions for potential losses on mortgages totalled 2.47 million, 0.20 per cent. of mortgage balances. Funding Net receipts from retail investors during the year amounted to million, including interest added to their accounts. Investors' balances in the form of retail shares and deposits now amount to 1, million, an increase of 7.92 per cent. on the previous year. The has continued to borrow from the wholesale money markets and, excluding accrued interest, the year end balance of million ( million), including non-retail subscribed capital, in non-retail funds represented per cent. ( per cent.) of total share and deposit liabilities. EVENTS SINCE THE END OF THE FINANCIAL YEAR Since the end of the financial year the Directors consider that there have been no events that have had a material effect on the Group's financial position. ASSOCIATED BODIES A subsidiary company that acquired the new headquarters and another to provide independent financial advice were established in the year. All other subsidiary and associated companies operate in the housing market and are subject to close monitoring. The housing related activities have not been extended during the year and attention has been concentrated on ensuring that the current operations are as efficient as possible. Further details of the 's associated bodies are shown in note 13 to the accounts. CHARITABLE AND POLITICAL DONATIONS During the year the Group made charitable donations of 51,684. No political donations were made. STAFF Staff are the most important asset of the Group and play a key role in its success. Every effort is made to ensure staff receive all information about the which may concern them as employees. Considerable investment in people has continued over the year. Staff are encouraged and given help to obtain a professional qualification. Extensive training in respect of products, customer care and personal development is provided. The Banking, Insurance and Finance Union (BIFU) continues to have the sole right to negotiate for staff of the and provides a channel through which staff may make their views known. The is an Equal Opportunities employer and follows the code of good practice on the employment of disabled people. It gives full and fair consideration to all disabled people who apply for employment and seeks to develop their skills and potential. AUDITORS In accordance with Section 77 of the Building Societies Act 1986 a resolution for the reappointment of KPMG Peat Marwick as auditors of the is to be proposed at the forthcoming Annual General Meeting. 75

76 NORTH OF ENGLAND DIRECTORS The following served as Directors during the year under review: Ronald Shiel (Chairman) John H. Elsy (Deputy Chairman) Gavin M. Black Sir David Chapman, Br. Thomas Collin Robert A. Edmonds Simon M. Featherstone (Group Finance Director) Angus M. Griffin (Deputy Group Chief Executive) Kenneth L. Hayton Robert Hudson Robert W. Linden (Group Chief Executive) John S. Ward, OBE (appointed 11th October, 1993) David K. Wilson Mr T. Collin and Mr R. Hudson retired as Directors (under Rule 32(1)) at the Annual General Meeting on 21st April, At the Annual General Meeting on 20th April, 1994 Sir David Chapman, Bt. and Mr J. H. Elsy retire under Rule 32(1), Mr J. S. Ward, OBE retires under Rule 31(4) and Mr R. A. Edmonds retires under Rule 30(l)(j). Except for Mr R. A. Edmonds, who is ineligible due to reaching the mandatory retirement age, they are all eligible and willing to serve on the Board again and will be declared re-elected as provided under Rule 32(5). As at 31st December, 1993 no Directors held shares in, or debentures of, associated bodies of the, except a nominal single shareholding that is held in trust for the. Ronald Shiel, Chairman 24th February,

77 NORTH OF ENGLAND 1. STATUTORY RATIOS AND PERCENTAGES ANNUAL BUSINESS STATEMENT For the year ended 31st December, 1993 Statutory limit As a percentage of shares and deposits Non-retail funds and deposits Deposits As a percentage of total commercial assets Advances secured on residential property (class 1 assets) n/a Advances secured on land, other than residential property (class 2 assets) n/a Other commercial assets (class 3 assets) Class 2 and class 3 assets % % Explanation of terms The amounts shown in the Group accounts for shares and deposits, both retail and non-retail, include interest accrued but not yet payable at the balance sheet date. The above ratios are calculated excluding this interest accrued but not yet payable as shown below: 000 Non-retail funds and deposits exclude accrued interest of 3,702,961 and represent Amounts owed to credit institutions 129,000 Subscribed capital (not qualifying as retail balances) 10,318 Other deposits 96,944 Shares 17, ,527 Shares and deposits exclude accrued interest of 30,649,117 and represent: m Shares 1,090,800 Deposits 23,632 Non-retail funds and deposits 243,209 1,357,641 Subscribed capital 19,758 1,377,399 Deposits exclude accrued interest of 3,495,104 and represent: Retail deposits 23,632 Amounts owed to credit institutions 129,000 Other deposits 96, ,576 Total commercial assets represent: Advances secured on residential property 1,028,911 Advances secured on other property 145,462 Office premises less than 30% occupied by the 156 Investments in and loans to associated bodies 38,928 Land held for development by associated bodies 3,621 1,217,078 77

78 NORTH OF ENGLAND 2. OTHER PERCENTAGES 31st 31st December, December, % % As a percentage of share and deposit liabilities: Gross capital Free capital As a percentage of total assets: Liquid assets Profit after taxation as a percentage of: Mean reserves Mean total assets Explanation of terms The above percentages have been calculated from the Group balance sheet. Gross capital represents the general reserve together with subscribed capital (PIBS), as shown in the balance sheet. Free capital represents gross capital and general provision for bad and doubtful debts less fixed assets as shown in the balance sheet. Shares and deposits represent the total of retail and non-retail funds and deposits excluding accrued interest. Mean reserves are the average of the 1993 and 1992 general reserve. Mean total assets are the average of the 1993 and 1992 total assets. 3. DIRECTORS AND OTHER OFFICERS AT 31ST DECEMBER, 1993 Directors Date of Date first Business Birth Appointed occupation Ronald Shiel 6/11/24 1/79 Building Chairman Chairman of the Charitable Activities Committee Non-Executive Chairman of the Remuneration Committee Director Member of the Audit Committee Other Directorship North of England Property Services Ltd. John H. Elsy, FIMgt 2/12/39 6/81 Industrial Deputy Chairman Consultant Member of the Audit Committee Member of the Remuneration Committee Gavin M. Black, FRICS 19/7/49 12/92 Chartered Chairman of the Subsidiary & Associated Surveyor Companies Committee Other Directorships Chesterton International Ltd., The Newcastle Initiative. Sir David R. M. Chapman Bt., B.Comm 16/12/41 6/74 Stockbroker Chairman of the Personnel Committee, Member of the Charitable Activities Committee Other Directorships Breathe North Ltd. British Lung Foundation Ltd., Team General Partner Ltd., Wise Speke Ltd. 78

79 NORTH OF ENGLAND Directors (continued) Date of Date first Business Birth Appointed occupation Robert A. Edmonds, FRICS, ACIArb 15/3/24 7/90 Chartered Member of the Subsidiary & Associated Surveyor Companies Commitee Other Directorships Nomad Properties PLC, Northumberland Masonic Property Trust Ltd. Simon M. Featherstone, BA, FCA 15/3/53 9/92 Group Finance Member of the Charitable Activities Committee, Director Member of the Subsidiary 6c Associated Companies Committee Other Directorships Dunelmian Homes Ltd., Homeowner Administration Services Ltd. North of England Estate Agents Ltd., North of England Financial Services Ltd., North of England Property Services Ltd., SMNE Ltd., Angus M. Griffin, ACIB, FCI, FIMgt 21/11/44 9/92 Deputy Group Member of the Personnel Committee, Member of Chief the Subsidiary & Associated Companies Executive Committee Other Directorships Dunelmian Homes Ltd., F&NE Ltd., F&NE (1990) Ltd., Homeowner Administration Services Ltd., Meadowvale Properties Ltd. MNE Ltd., North of England Homeowner Services Ltd., North of England Homes Ltd., North of England Property Services Ltd. SMNE Ltd. Kenneth L. Hayton, LLB 27/1/33 8/69 Solicitor Member of the Audit Committee, Member of the Personnel Committee Other Directorship Sharon Court (Cowes) Management Co. Ltd. Robert W. Linden, AIB (Scot), FIMgt /88 Group Chief Member of the Charitable Activities Committee, Executive Member of the Personnel Committee, Member of the Subsidiary & Associated Companies Committee Other Directorships Craghead Properties Ltd. Dunelmian Homes Ltd., F&NE Ltd., F&NE (1990) Ltd., Funds Transfer Sharing Ltd., Homeowner Administration Services Ltd., Meadowvale Properties Ltd., MNE Ltd., NOEBS Property Developments Ltd., North of England Estate Agents Ltd., North of England Financial Services Limited, North of England Group Limited, North of England Homeowner Services Ltd., North of England Homes Ltd., North of England Property Services Ltd., SMNE Ltd., Wearside TEC Ltd. John S. Ward, OBE, ACIB 28/9/33 10/93 Financial Member of the Personnel Committee, Member of Management the Subsidiary & Associated Companies Consultant Committee Other Directorships Cruddas Park & Loadman Street Community Trust Ltd., Newcastle Theatre Royal Trust Ltd., Newcastle upon Tyne West End Partnership City Challenge Board. Northern Enterprise Ltd., Northern Investors PLC, Northumbrian Water Group PLC, St. Thomas Street Managed Workshops, Tyne & Wear Development Corporation. David K. Wilson, FCA 22/2/44 6/91 Chartered Chairman of the Audit Committee Accountant Other Directorships Ascham House School Trust Ltd., Newcastle Mental Health NHS Trust. The Northumberland Golf Club Ltd. 79

80 NORTH OF ENGLAND Directors' Service Contracts The three executive directors, R. W. Linden, S. M. Featherstone and A. M. Griffin, have three year service contracts with the which are renewable on each anniversary of the contract date. All the executive directors must give at least six months notice of their intention to terminate the contract. No other director has a service contract with the. Other officers Michael O. Bradford, LLB, FCIB, MIMgt General Manager Iain R. Brown, IPFA Group Chief Internal Auditor J. Graham Crosby, BSc Assistant General Manager Rodney E. Hepple-Wilson, BA, MIMgt Group Compliance Officer David J. Hodgson, LLB Group Secretary Leslie Hodgson, BA, ACA Assistant General Manager Directorships BESSA North of England Plc BESSA North of England II Plc BESSA North of England III Plc Pinerose Properties Limited Widewad Limited Paul L. Maggiore, LLB Chief Solicitor Ian H. Telfer Strategic Relations Executive Geoffrey Turnbull General Manager Documents may be served on the above named directors and officers at the following address: KPMG Peat Marwick, Maybrook House, 27 Grainger Street, Newcastle upon Tyne NE1 5JT. 4. AVERAGE RATES Average Average Interest yield/ balance earned/ rate outstanding payable payable % Assets: Liquid assets 256,786 16, Secured advances 1,156,417 90, Liabilities: Retail funds and deposits 1,070,214 63, Non-retail funds and deposits 242,044 16, The figures shown above are taken from the Group accounts and represent the major categories of interest bearing assets and liabilities. The average balance within each category is the simple average of the balance at the beginning of the financial year and the balance at the end of the financial year, excluding accrued interest. Interest earned/payable is the amount shown in the Group income and expenditure account. The average yield/rate represents interest earned/payable as a percentage of the average balance outstanding. 5. NEW ACTIVITIES During the year the Group did not exercise any new power for the first time. 80

81 NORTH OF ENGLAND AUDITORS' REPORT TO MEMBERS OF NORTH OF ENGLAND There appears below the text of the Auditors' Report to the members of North of England, as printed in the North of England's Report and Accounts 1993 which is included in this document in compliance with Section 80 of the Act. It should be noted that references to page numbers in the Auditor's Report are to pages in the North of England's Report and Accounts 1993 and not to pages in this document. AUDITORS' REPORT Auditors' Report to the members of North of England Building. We have audited the accounts on pages 21 to 35 and have examined the annual business statement and the directors' report set out on pages 36 to 39 and pages 17 to 19 respectively. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As described on page 20 the 's directors are responsible for the preparation of accounts and other information which we have examined. It is our responsibility to form an independent opinion on the accounts and other information and to report our opinion to you. ACCOUNTS Basis of opinion We conducted our audit of the accounts set out on pages 21 to 35 in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the 's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts. Opinion In our opinion the accounts give a true and fair view of the state of affairs of the and the Group at 31st December, 1993, of the income and expenditure of the and the Group for the year then ended and of the manner in which the business of the Group was financed and in which the Group's financial resources were used during the year. OTHER INFORMATION We have examined the annual business statement on pages 36 to 39, other than the details of directors and officers upon which we are not required to report. In our opinion the information which we have examined gives a true representation of those matters referred to therein. We have examined the directors' report on pages 17 to 19. In our opinion the information given therein is consistent with the accounting records and the annual accounts. In our opinion the accounts, the annual business statement and the directors' report have each been prepared so as to conform to the requirements of Part VIII of the Building Societies Act 1986 and regulations made thereunder. KPMG Peat Marwick Newcastle upon Tyne Chartered Accountants 24th February, 1994 Registered Auditors 81

82 UNITED KINGDOM TAXATION The following is a summary of the 's understanding of current law and practice in the United Kingdom relating to the taxation of the PIBS. The summary relates only to the position of persons who are the absolute beneficial owners of their PIBS and the interest paid on them and some aspects do not apply to certain classes of taxpayers (such as dealers). PIBS holders who are in any doubt as to their tax position or who may be subject to tax in a jurisdiction other than the United Kingdom should seek their own professional advice. 1. On payment of interest on the PIBS an amount must be withheld by the on account of United Kingdom income tax at the basic rate (currently 25 per cent.). PIBS holders who are individuals liable for tax at the higher rate may be liable to pay further United Kingdom tax on interest received, as may corporate PIBS holders. Certain classes of taxpayer (such as tax exempt investors) may be able to reclaim all or part of any tax deducted. Holders of PIBS who are not resident in the United Kingdom may be able to recover all or part of the tax deducted pursuant to the provisions of an applicable double taxation convention and may be able to make an individual claim to the relevant tax authorities for the receipt of interest gross. 2. PIBS are within the accrued income scheme. Accordingly, a disposal of PIBS by a PIBS holder who is resident or ordinarily resident in the United Kingdom, or who carries on a trade in the United Kingdom through a branch or agency to which the PIBS are attributable, may give rise to a charge to tax on income in respect of an amount representing interest on the PIBS which has accrued since the preceding interest payment date. 3. The PIBS will constitute "qualifying corporate bonds" within the meaning of section 117 of the Taxation of Chargeable Gains Act Accordingly, a disposal by a PIBS holder will not give rise to a chargeable gain or an allowable loss for the purposes of the United Kingdom taxation of capital gains. 4. No United Kingdom stamp duty or stamp duty reserve tax is payable on the issue or transfer of the PIBS. 5. The rules allowing certain United Kingdom individual investors to receive building society interest gross on certification that such investors are unlikely to be liable to pay any amount by way of income tax for the year in which the interest is paid do not apply to interest paid on PIBS. 82

83 TRANSACTIONS IN PIBS Upon the transfer of engagements of the North of England Building to the becoming effective, the PIBS will succeed the North of England PIBS without alteration in their terms. There will therefore be no new offering of the PIBS. Existing share certificates in respect of the North of England PIBS will remain valid evidence of title and PIBS holders may retain existing certificates indefinitely. On registration of any dealing in the PIBS, the new PIBS holder will be issued, in the normal way, with a new certificate evidencing title; such new certificate will show Northern Rock as the PIBS issuer. Alternatively, North of England PIBS holders may surrender their certificates to the Royal Bank of Scotland plc (at the address shown at the back of this document) at any time after 1st October, Holders will be furnished with share certificates showing Northern Rock as the PIBS issuer within one month after receipt by the Royal Bank of Scotland plc of their North of England PIBS certificates. Save for having obtained approval of this document by the London Stock Exchange pursuant to the listing rules made under Part IV of the Financial Services Act 1986 and having delivered copies thereof to the Registrar of Companies in England and Wales, no action has been or will be taken by the that would, or is intended to, permit a public offer of the PIBS or distribution of this document in any country or jurisdiction where action for that purpose is required. The PIBS may not be, directly or indirectly, offered or sold in any country or jurisdiction where action for that purpose is required. The does not represent that the PIBS may at any time lawfully be sold in or from any jurisdiction (other than in or from the United Kingdom) in compliance with any applicable registration requirements or pursuant to an exception available thereunder and does not assume any responsibility for facilitating such sales. 83

84 GENERAL INFORMATION 1. The listing of the PIBS on the London Stock Exchange will be expressed as a percentage of their principal amount (exclusive of accrued interest). It is current market practice that any transactions will normally be effected for settlement in sterling and for delivery on the seventh calendar day after the day of the transaction. It is expected that such listing will become effective and dealings will commence on 3rd October, Save as described elsewhere in this document, there has been no significant change in the financial or trading position of the Group or the North of England Group since 31st December, 1993, the date of the most recent audited accounts of the and the Group and North of England and the North of England Group. 3. Neither the nor any member of the Group is involved in, nor are there, so far as the Directors are aware, any legal or arbitration proceedings pending or threatened which may have, or have had during the previous 12 months, a significant effect on the financial position of the Northern Rock Group. Neither North of England nor any member of the North of England Group is involved in, nor are there, so far as the directors of North of England are aware, any legal or arbitration proceedings pending or threatened which may have, or have had during the previous 12 months, a significant effect on the financial position of the North of England Group. 4. The accounts of the and of its Group for each of the three financial years ended 31st December, 1993 were audited by Price Waterhouse, Chartered Accountants and Registered Auditors and have been reported upon without qualification. Price Waterhouse has given and not withdrawn its written consent to the issue of this document with the inclusion herein of its Auditors' Report and the references to its name in the form and context in which they appear and has authorised the contents of its Auditors' Report for the purposes of Section 152(l)(e) of the Financial Services Act The accounts of North of England and of the North of England Group for each of the three financial years ended 31st December, 1993 were audited by KPMG Peat Marwick, Chartered Accountants and Registered Auditors and have been reported upon without qualification. KPMG Peat Marwick has given and not withdrawn its written consent to the issue of this document with the inclusion of its Auditors' Report and the references to its name in the form and context in which they appear and has authorised the contents of its Auditors' Report for the purposes of Section 152(l)(e) of the Financial Services Act The re-listing of the PIBS was authorised by a resolution of the Board of Directors of the passed on 26th July, The Royal Bank of Scotland plc will continue to act as the registrar (the "Registrar") of the in respect of the PIBS. 7. As further described on page 83, the Registrar will send a PIBS certificate to each registered holder of PIBS within one month of registration of any dealing at the risk of the person entitled thereto. No temporary documents of title will be issued. 8. Save as provided below, the and its subsidiaries have not entered into any material contract other than in the ordinary course of business within the two years immediately preceding the date of this document. On 18th March, 1993, Surrey Building and the entered into an instrument of transfer of engagements under which the parties agreed that the engagements of Surrey Building be transferred to the pursuant to the requirements and provisions of the Act and accordingly that the accepted and became subject to all liabilities and obligations of Surrey Building, as they existed on 5th July, 1993 and undertook to fulfil and discharge all such liabilities and obligations as and from 5th July, On 10th June, 1994, the entered into an instrument of transfer of engagements with North of England under which the parties agreed that the engagements of North of England be transferred to the in accordance with the requirements and provisions of the Act and accordingly that the accept and become subject to all liabilities and obligations of North of England as they exist on the date specified in the registration certificate issued by the Commission in accordance with Section 94(8) of the Act (1st October, 1994). Under the terms of the instrument of transfer of engagements, the undertook to credit the accounts of qualifying North of England members with a bonus at the rate of 1/2 84

85 per cent. gross on the lowest balance standing to the credit of their accounts during the qualifying period, subject to a minimum payment of Save as provided below, North of England and its subsidiaries have not entered into any material contract other than in the ordinary course of business within the two years immediately preceding the date of this document. On 10th June, 1994 North of England entered into an instrument of transfer of engagements with the, as further described in 8 above. 10. The only outstanding loans granted by any. member of the Northern Rock Group to directors of the are an aggregate of 448,615 mortgage loans as at 31st December, 1993 made by the. The only outstanding loans granted by any member of the North of England Group to directors of North of England are an aggregate of 271,348 mortgage loans as at 31st December, 1993 made by North of England. No guarantees have been provided by the or its subsidiaries or by North of England or its subsidiaries in respect of any directors of the or of North of England. 11. The total aggregate of the remuneration paid and benefits in kind granted to the directors of the during the financial year ended 31st December, 1993 amounted to 717,000. During the same period the total aggregate figure in respect of the directors of North of England amounted to 540, (a) Neither the directors of the nor those directors of North of England who, on the transfer of engagements will become directors of the, have any interests in any transactions which are or were unusual in their nature or conditions or significant to the business of the and its subsidiaries and which were effected by the during the current or immediately preceding year or were effected by the during an earlier financial year and remain in any respect outstanding or unperformed. (b) Save as set out below, no Director of the nor any director of North of England nor any connected person of any such director has any interest in any of the PIBS. Mrs Sybil Hayton is the registered and beneficial holder of 4,000 of North of England PIBS. 13. At the present time no directors of the have service contracts with any member of the Group. Negotiations are, however, currently taking place with a view to providing service contracts to the executive directors of the but the terms have not yet been settled. The service contracts of Mr R. W. Linden, Mr A. M. Griffin and Mr S. M. Featherstone, directors of North of England, are available at the registered office of North of England. It is not intended that any of the three North of England directors who will become directors of Northern Rock will have service contracts. 14. The PIBS shall be transferable in a form approved by the Board in accordance with the Rules. 15. There has been no material adverse change in the financial position or prospects of the Group since 31st December, 1993, the date of the most recent published annual accounts of the Group. 16. Copies of the following documents will be available for inspection during normal business hours on any weekday (Saturdays and public holidays excepted) at the principal office of the and at offices of Allen & Overy, 9 Cheapside, London EC2V 6AD for 14 days from the date of this document: (a) the Memorandum and Rules of the and the Building Societies Act 1986; (b) the audited accounts of the and the Group for each of the financial years ended 31st December, 1991, 1992 and 1993; (c) the audited accounts of North of England and its Group for each of the financial years ended 31st December, 1991, 1992 and 1993; (d) the unaudited accounts of the Group for the six months ended 30th June, (e) the unaudited accounts of the North of England Group for the six months ended 30th June, 1994; (f) the instruments of transfer of engagements referred to in paragraph 8 above; (g) drafts (subject to modification) of a PIBS certificate (including the special terms of issue of the PIBS); (h) the consent letter dated 30th September, 1994 of Price Waterhouse; and (i) the consent letter dated 30th September, 1994 of KPMG Peat Marwick. 85