Directors report and financial statements for the period 3 July to 31 December
Contents Directors and advisers 1 Directors report for the period 3 July to 31 December 2 Independent auditors report to the members of Northern Rock plc 5 Income statement for the period 3 July to 31 December 6 Statement of comprehensive income 7 Balance sheet as at 31 December 8 Statement of changes in equity for the period 3 July to 31 December 9 Cash flow statement for the period 3 July to 31 December 10 Notes to the financial statements for the period 3 July to 31 December 11
Directors and advisers Directors R A Sandler G A Hoffman L P Adams J R Coates M E Fairey R D Hunkin M A Pain M C Phibbs J McConville Company secretary J Fitzpatrick Registered office Northern Rock House Gosforth Newcastle upon Tyne Tyne and Wear NE3 4PL Website northernrock.co.uk Registered number 06952311 Independent auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 89 Sandyford Road Newcastle upon Tyne NE1 8HW 1
Directors report for the period 3 July to 31 December The Directors present their report and the audited financial statements of the Company for the period from incorporation on 3 July to 31 December. Principal activities Northern Rock plc (the Company) is a public limited company incorporated in England and Wales. The Company was incorporated on 3 July as Gosforth Subsidiary No.1 Limited. The Company changed its name to Gosforth Subsidiary No.1 plc on 10 November and then to Northern Rock plc on 31 December ahead of the legal and capital restructure of the former Northern Rock plc (now known as Northern Rock (Asset Management) plc), which subsequently took place on 1 January 2010. The Company did not trade in the period to 31 December. On 1 January 2010 the Company became a retail and savings bank under the terms of Statutory Instrument /3226 ( The Northern Rock Transfer Order ), which effected a legal and capital restructuring of Northern Rock into two companies. Under the terms of this order the Company acquired certain elements of the business of Northern Rock (Asset Management) plc as described in note 13 to the financial statements. Review of business, future developments, principal risks and uncertainties The results for the period are set out in the income statement on page 6. Details of the Company s principal risks and uncertainties are given in note 12 to the financial statements. As a result of the legal and capital restructure on 1 January 2010, 10.3 billion of mortgages and 19.5 billion of retail savings were transferred from Northern Rock (Asset Management) plc into the Company. The Company also holds certain wholesale deposits. The aim is for there to be a full operational separation between the Company and Northern Rock (Asset Management) plc during 2010. The Company is a well capitalised retail and savings bank that will hold and service all transferred customer savings accounts and mortgage accounts, as well as offering new mortgage and savings products to new and existing customers. It is regulated by the Financial Services Authority (FSA). In preparing the accounts the Directors have considered the impact of the Transfer Order on the appropriateness of adopting the going concern basis. In concluding that the going concern basis is appropriate, the Directors have taken into account the projected profitability, liquidity and capital positions of the Company post transfer. This has included consideration of the likely and actual impact of the removal of the retail savings guarantee (see below) along with the steps being taken to manage the transferred infrastructure and employee costs, and current and prospective economic conditions. Post balance sheet events On 1 January 2010 a legal and capital restructuring took place resulting in the transfer of certain assets and liabilities from Northern Rock (Asset Management) plc to the Company. On 24 February 2010 the Company confirmed that the Government, in consultation with the FSA, had completed a review of the retail savings guarantee put in place in September 2007, and concluded that the guarantee could be released subject to the relevant notice period of three months being given for customers. This reflected Northern Rock s good progress and the Company s strong capital and liquidity position. It also ensures that the Company can compete on the same terms as other banks and building societies. Further details of post balance sheet events, including details of the assets and liabilities transferred from Northern Rock (Asset Management) plc to the Company under The Northern Rock Transfer Order, are given in note 13 to the financial statements. Under the terms of The Northern Rock Transfer Order a branch office in Ireland and a subsidiary through which the Company operates in Guernsey, were transferred from Northern Rock (Asset Management) plc to the Company on 1 January 2010. Since then the Company has concluded that Northern Rock (Guernsey) Limited ( NRG ), its wholly owned subsidiary, no longer meets the long-term commercial objectives of the Company. NRG has written to all of its customers on 2 June 2010 to inform them of the closure and to provide three months notice to close their account. NRG will close on 2 September 2010. Financial risk management Details of financial risk management are given in note 12 to the financial statements. Significant shareholdings As at the date of this report, all of the issued share capital is held by the Treasury Solicitor as nominee for HM Treasury. 2
Directors report for the period 3 July to 31 December (continued) Creditor payment policy The Company s policy with regard to the payment of suppliers is to negotiate and agree terms and conditions with all its suppliers, which include the giving of an undertaking to pay them within a mutually agreed payment period. Directors The current composition of the Board of Directors together with brief biographical details of each Director is shown on the Company s website. The following table shows details of Board appointments and resignations during the period and up to the date of signing this report. D A Jones Appointed 3 July and resigned 19 November A Mooney Appointed 3 July and resigned 19 November G A Hoffman Appointed 19 November L P Adams Appointed 19 November J R Coates Appointed 19 November M E Fairey Appointed 1 January 2010 R D Hunkin Appointed 1 January 2010 M A Pain Appointed 1 January 2010 M C Phibbs Appointed 1 January 2010 R A Sandler Appointed 1 January 2010 J McConville Appointed 8 April 2010 The Company s Articles of Association provide an indemnity to Directors against certain liabilities incurred as a result of their office. The indemnities extend to defending any proceedings in which judgment is given in the Directors favour or in which they are acquitted or in any proceedings in which relief is granted by a court from liability for negligence, default, breach of duty or breach of trust in relation to the affairs of the Company. The Company has also provided each Director with a Deed of Indemnity indemnifying them to the fullest extent permitted by law against all losses suffered or incurred in respect of acts and omissions arising as a result of holding office. The indemnity also extends to reimbursing each Director with the costs of defending any proceedings, regulatory investigation or proposed action by a regulator brought in connection with any alleged negligence, default, misfeasance, breach of duty or breach of trust against the Director in relation to the Company. Reimbursement is subject to the Director s obligation to repay the Company in accordance with the provisions of the Companies Act 2006. The payment obligations of the Company under each Deed of Indemnity are backed by specific guarantee in favour of the Director entered into between the Company and HM Treasury. The Company has also arranged Director s and Officer s insurance on behalf of the Directors in accordance with the provisions of the Companies Act 2006. The Company s Articles of Association require that each Director stands for re-election at least every three years and that Directors appointed by the Board should be subject to election at the first opportunity after their appointment. Therefore all Directors of the Company are subject to election at the next AGM since all are newly appointed. Dividends The Directors do not propose the payment of any dividends on the ordinary shares in respect of the period ended 31 December. Directors responsibilities statement The Directors are responsible for preparing the Directors Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether applicable International Financial Reporting Standards (IFRSs) as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. 3
Directors report for the period 3 July to 31 December (continued) The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Disclosure of information to auditors Each of the persons who is a Director at the date of this report confirms that: so far as the Director is aware, there is no relevant audit information of which the Company s auditors are unaware; and each Director has taken all the steps thet he/she ought to have taken as Director in order to make himself/herself aware of any relevant audit information and to establish that the Company s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. By order of the Board J Fitzpatrick Company secretary 14 June 2010 4
Independent auditors report to the members of Northern Rock plc We have audited the financial statements of Northern Rock plc for the period from 3 July to 31 December which comprise the Income Statement, the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity, the Cash Flow Statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Respective responsibilities of Directors and Auditors As explained more fully in the Directors responsibilities statement set out on page 3, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. Opinion on financial statements In our opinion the financial statements: give a true and fair view of the state of the Company s affairs as at 31 December and of its profit and cash flows for the period then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors report for the financial period for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the financial statements are not in agreement with the accounting records and returns; or certain disclosures of Directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. David Roper (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Newcastle upon Tyne 14 June 2010 5
Income statement for the period 3 July to 31 December Note 3 July to 31 December Interest and similar income 3 19,184 Administrative expenses 4 (10,000) Profit before taxation 9,184 Income tax expense 5 (2,572) Profit for the period 6,612 The notes on pages 11 to 16 form an integral part of these financial statements. 6
Statement of comprehensive income 3 July to 31 December Profit for the period 6,612 Other comprehensive income - Total comprehensive income 6,612 7
Balance sheet as at 31 December Note Assets Cash and balances with central banks 6 1,400,019,185 Other assets 7 37,498 Total assets 1,400,056,683 Liabilities Loan from HM Treasury 8 1,399,987,499 Current income tax liabilities 2,572 Other liabilities 10,000 Total liabilities 1,400,000,071 Equity Called up share capital 9 50,000 Retained earnings 10 6,612 Total equity attributable to owners of the parent 56,612 Total equity and liabilities 1,400,056,683 The notes on pages 11 to 16 form an integral part of these accounts. Approved by the board of Directors on 14 June 2010 and signed on its behalf by: R A Sandler Chairman G A Hoffman Chief Executive Officer Northern Rock plc is registered in England and Wales under Company Number 06952311. 8
Statement of changes in equity for the period 3 July to 31 December Note Called up share capital Retained earnings Total equity Balance at 3 July - - - Profit for the period 100-6,612 6,612 Other comprehensive income - - - Total comprehensive income - 6,612 6,612 Transactions with owners Issuance of share capital 9 50,000-50,000 Balance at 31 December 50,000 6,612 56,612 9
Cash flow statement for the period 3 July to 31 December 3 July to 31 December Net cash outflow from operating activities Administrative expenses (10,000) Interest received 19,184 Changes in operating assets and liabilities: Increase in other assets (37,498) Increase in other liabilities 10,000 Net cash outflow from operating activities (18,314) Net cash inflow from financing activities Increase in loan from HM Treasury 1,399,987,499 Issuance of fully paid share capital 2 Issuance of partly paid share capital 49,998 1,400,037,499 Net increase in cash and cash equivalents 1,400,019,185 Opening cash and cash equivalents - Closing cash and cash equivalents 1,400,019,185 10
Notes to the financial statements for the period 3 July to 31 December 1. Principal accounting policies a) Accounting convention These financial statements have been prepared in accordance with EU endorsed International Financial Reporting Standards ( IFRS ), International Financial Reporting Interpretations Committee ( IFRIC ) interpretations and with those parts of the Companies Act 2006 applicable to Companies reporting under IFRS. The financial statements have been prepared under the historical cost convention. A summary of the more important Company accounting policies is set out below. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. b) Interest income Interest income is recognised on an accruals basis in the income statement in the period to which it relates. c) Cash and cash equivalents Cash and cash equivalents comprise entirely of cash and balances with central banks. d) Taxation i) Current income tax Income tax payable/(receivable) is calculated on taxable profits/(losses) based on the applicable tax law in each jurisdiction where the Company operates and is recognised as an expense/(income) for the period except to the extent that it relates to items that are charged or credited to other comprehensive income or to equity. Where the Company has tax losses that can be relieved against a tax liability for a previous period, it recognises those losses as an asset, because the tax relief is recoverable by refund of tax previously paid. This asset is offset against an existing current tax balance. Where tax losses can be relieved only by carry forward against taxable profits of future periods, a deductible temporary difference arises. Those losses carried forward, if provided for, are set off against deferred tax liabilities carried in the balance sheet. Current income tax assets and liabilities are only offset when they arise in the same reporting tax group and where there is both a legal right to offset and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously. ii) Deferred income tax Deferred income tax is calculated using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates and laws that have been enacted or substantially enacted by the date of the balance sheet and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. The principal temporary differences arise from depreciation of property, plant and equipment, revaluation of certain financial assets and liabilities including derivative contracts, provisions for pensions and other post-retirement benefits and carry forwards; rolled over gains on disposal of property, plant and equipment; unremitted earnings from overseas subsidiaries; and change in accounting basis on adoption of IFRS. Deferred income tax assets are recognised when it is probable that future taxable profits will be available against which these temporary differences can be utilised. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the difference will not reverse in the foreseeable future. The tax effects of carry forwards of unused losses or unused tax credits are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised. Deferred income tax related to fair value re-measurement of available for sale investments and cash flow hedges, which are recognised in other comprehensive income, is also recognised in other comprehensive income and subsequently in the consolidated income statement together with the deferred gain or loss. Deferred income tax assets and liabilities are only offset when they arise in the same reporting tax group and where there is both a legal right to offset and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously. e) Borrowings Borrowings are initially recognised at fair value including direct and incremental transaction costs. Subsequent recognition is at amortised cost using the effective interest method. f) Share capital Ordinary shares are classified as equity. g) Implementation of new standards and amendments to published standards and interpretations effective during The following new standards, amendments to standards or interpretations are mandatory for the first time for financial periods beginning on 1 January and have been endorsed for adoption by the EU and are relevant to the Company: International Accounting Standards 1 ( IAS 1 ) (revised) Presentation of financial statements. This standard has resulted in changes to the Statement of Recognised Income and Expense. This has been split into two statements, one showing changes in equity resulting from transactions not reflected in the income statement and the other showing changes in equity resulting from transactions with shareholders. Amendment to IFRS 7 Improving Disclosures about Financial Instruments. This amendment has changed the IFRS 7 disclosure requirements, but this will not have an impact on the statutory accounts of Northern Rock plc until the year ended 31 December 2010. The following new standards, amendments to standards or interpretations are also mandatory for the first time for financial years during and have been endorsed for adoption by the EU, but have no material financial impact on the Company. These are applicable from 1 January unless otherwise stated: IFRS 8 Operating segments IAS 23 (revised) Borrowing costs IFRIC 13 Customer loyalty programmes Amendment to IFRS 2 Share-based payment: Vesting conditions and cancellations IAS 32 (amendment) Financial instruments: presentation, and consequential amendments to IAS 1 Revised IFRS 3 Business combinations. This is effective for annual periods beginning on or after 1 July Revised IAS 27 Consolidated and separate financial statements. This is effective for annual periods beginning on or after 1 July IFRIC 14 IAS 19 The limit on a defined benefit asset, minimum funding requirement and their interaction 11
1. Principal accounting policies (continued) IFRIC 16 Hedges of a net investment in a foreign operation. This is effective for annual periods beginning on or after 1 October 2008 Improvements to IFRSs IFRS 1 (revised) First time adoption of IFRS. This is effective for annual periods beginning on or after 1 July Amendment to IFRS 1 First time adoption of IFRS and IAS 27 Consolidated and separate financial statements on the Cost of an investment in a subsidiary, jointly controlled entity or associate IFRIC 18 Transfer of assets from customers. This is effective for annual periods beginning on or after 1 July Amendment to IAS 32 Financial instruments: Presentation and IAS 1 Presentation of financial statements on puttable financial instruments and obligations arising on liquidation Amendments to IFRIC 9 and IAS 39 regarding embedded derivatives. This is effective for annual periods beginning on or after 1 July 2008 Amendment to IAS 39, Financial instruments: Recognition and measurement and IFRS 7, Financial instruments: Disclosures on the Reclassification of financial assets. This is effective for annual periods beginning on or after 1 July 2008 Amendment to IAS 39 Financial instruments: Recognition and measurement: Eligible hedged items. This is effective for annual periods beginning on or after 1 July IFRIC 15 Agreements for the construction of real estate IFRIC 17 Distribution of non-cash assets to owners. This is effective for annual periods beginning on or after 1 July. h) Standards, interpretations and amendments to published standards that are not yet effective and the early adoption of standards The Company has not early adopted any standards or interpretations during. The following new standards, amendments to standards or interpretations that are relevant to the Company have been issued but are not effective for financial years beginning 1 January and have not been endorsed by the EU: Amendment to IAS 24 Related party disclosures. Management is assessing the impact of this amendment on its financial statements, to ensure it meets the revised disclosure requirements introduced by this amendment IFRS 9 Financial instruments. Management is assessing the impact of this amendment on its financial statements, to ensure it meets the revised disclosure requirements introduced by this amendment. The following new standards, amendments to standards or interpretations are not effective for financial years beginning 1 January and have been endorsed by the EU, but have no material impact on the Company: Amendments to IAS 32 Financial instruments: Presentation on classification or rights issues. IFRS 2 Share-based payment Group cash-settled share-based payment transactions. The following new standards, amendments to standards or interpretations are not effective for financial years beginning 1 January, have not been endorsed by the EU and have no material financial impact on the Company: IFRIC 19 Extinguishing financial liabilities with equity instruments Amendment to IFRIC 14, IAS 19 Prepayments of a minimum funding requirement Amendments to IFRS 1, on first time adoption of IFRS additional exemption Amendments to IFRS 1, First time adoption of IFRS Annual improvements 2010. 2. Director emoluments and employee information None of the Directors received any emoluments in respect of their services to the Company in the period. The Company had no employees other than the Directors and Company Secretary in the period. 3. Interest and similar income On balances held with the Bank of England 19,184 4. Administrative expenses Fees payable to the Company auditor for the audit of the financial statements 10,000 12
5. Income tax expense The income tax expense for the period comprises: UK corporation tax on profits for the period 2,572 The income tax expense can be reconciled to the profit per the income statement as follows: Profit before taxation 9,184 Tax on profit at standard UK tax rate of 28% 2,572 6. Cash and balances with central banks Balances with Bank of England 1,400,019,185 Balances held with the Bank of England are considered to be current. 7. Other assets Unpaid share capital 37,498 The unpaid share capital was paid on 1 January 2010. 8. Loan from HM Treasury Amount due to HM Treasury 1,399,987,499 The loan from HM Treasury was granted in order to provide cash which was to be converted to equity on 1 January 2010 on completion of The Northern Rock Transfer Order. If the Transfer Order had not occurred then the loan would have been due for immediate repayment. No interest is payable on the loan. 9. Called up share capital Number Authorised share capital Ordinary shares of 1 each 50,000 50,000 Number Issued and fully paid share capital Ordinary shares of 1 each issued on 3 July 2 2 Issued and partly paid share capital Ordinary shares of 1 each issued on 6 November 49,998 49,998 50,000 50,000 13
9. Called up share capital (continued) Reconciliation of called up share capital Number Balance at 3 July - Issuance of ordinary shares 50,000 Balance at 31 December 50,000 10. Retained earnings Profit for the period 6,612 Balance at 31 December 6,612 11. Related party transactions As all shares in the Company are held by the Treasury Solicitor, the Company regards the Government as a related party. Details of transactions between the Company and the Government are given below. Amounts owed by HM Treasury Amounts owed at 3 July - Issuance of unpaid share capital 37,498 Amounts owed at 31 December 37,498 Amounts due to HM Treasury Loans outstanding at 3 July - Amounts advanced 1,399,987,499 Loans outstanding at 31 December 1,399,987,499 The proceeds from the loan from HM Treasury were held with the Bank of England. Interest earned on cash held with the Bank of England in the period was 19,184. 12. Financial risk management Financial assets Loans and receivables Cash and balances with central banks 1,400,019,185 Other assets 37,498 Total assets 1,400,056,683 Financial liabilities at amortised cost Loan from HM Treasury 1,399,987,499 Current income tax liabilities 2,572 Other liabilities 10,000 Total liabilities 1,400,000,071 Equity 56,612 Total equity and liabilities 1,400,056,683 The carrying value of each financial asset and liability is considered to be a reasonable approximation of the fair value due to the short term maturity dates of these items. 14
12. Financial risk management (continued) Following the transfer of assets and liabilities on 1 January 2010 as set out in note 13 to the financial statements, the principal risks that the Company manages are as follows: Credit risk: The risk of the current or prospective loss to earnings and capital (expected and unexpected loss) arising from lending as a result of debtors or counterparties defaulting on their obligations due to the Company. The unpaid share capital held in other assets has been settled by HM Treasury after the balance sheet date. Liquidity risk: The risk that the Company is unable to meet its obligations as they fall due. The loan from HM Treasury has been converted into share capital on 1 January 2010. Market risk: The risk that changes in the level of interest rates, the rate of exchange between currencies or the price of securities or other financial contracts, including derivatives, will have an adverse impact on the results of operations or financial condition of the Company. The loan payable to HM Treasury as at 31 December does not carry any interest and is therefore not subject to market risk. Regulatory risk: The risk of failing to comply with the legal and regulatory requirements applying to Northern Rock s arrangements and activities, with the potential consequences of:- Customers being unfairly treated or suffering financial or other detriment; Legal or regulatory sanctions; Reputational loss and the associated financial and business impacts; Risks to market confidence or stability; and The Company being used for the purposes of financial crime. Operational risk: The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Legal risk: The risk of failure to comply with the law and ineffective management of legal risk including legal and/or regulatory sanctions, documentation failing to achieve its purpose and/or being unenforceable, financial or reputational loss to the Company and risks to market conditions. Transition risk: During the transitional period, a number of material risks may arise as a consequence of the Company s migration from the legal and capital restructure to full operational separation. The principal risks are execution of the Transition Plan, potential service delivery failure, conflicts of interest. Capital management Northern Rock plc was not regulated by the FSA during the period. Following becoming a retail and savings bank on 1 January 2010 the Company now has to comply with FSA capital regulations. Governance Details of the Company s committees from 1 January 2010 are set out below. The Board operates the following main committees: Audit Committee considers and, where appropriate, advises the Board on all matters relating to regulatory, prudential and accounting requirements that affect the Company. It reports to the Board on both financial and non-financial controls and monitors the integrity of the financial statements of the Company and any formal announcements relating to the Company s financial performance. As part of its remit it oversees anti-money laundering and whistle blowing procedures. Risk Committee is responsible for reviewing, on behalf of the Board, the key risks inherent in the business, the systems of control necessary to manage such risks, and to present its findings to the Board. Remuneration Committee is responsible for considering and advising the Board on the remuneration policy for Executive Directors and the Chairman, and for determining their remuneration packages. Nominations Committee monitors and reviews the membership of, and succession to, the Board of Directors and the Committee makes recommendations to the Board in this regard. Executive Committee (ExCo) is the most senior management operating committee, chaired by the Chief Executive Officer ( CEO ). It is responsible for developing and delivering against a Board approved strategy and ensuring the effective and smooth running of the business within Board approved risk appetites. ExCo has established seven sub committees which provide for further focus in respect of risk management: Retail Credit Risk Committee (RCRC) is responsible for ensuring all aspects of Retail Credit Risk are monitored, reported and controlled. Operational Risk and Compliance Committee (ORCC) is the executive level committee through which all aspects of the high level operational risk and control environment are monitored. Asset and Liability Committee (ALCO) is responsible for overseeing the asset, liquidity, liability, solvency, market, wholesale credit and liquidity risk (referred to as financial risk ). Retail Products and Limits Committee (RPLC) is responsible for establishing and maintaining an effective framework within which new products are reviewed, approved and monitored. 15
Major Projects Committee (MPC) ensure all major project decisions are aligned to the Board approved strategy, and that appropriate resource is aligned to deliver. Capital Management Committee (CMC) is the executive level committee through which all aspects of capital management are monitored, reported and controlled. Offshore Management Committee (OMC) ensures that all offshore subsidiaries are effectively run and well controlled by offshore management within the local regulatory regimes. 13. Events after the balance sheet date On 1 January 2010 the following assets and liabilities were transferred to Northern Rock plc from Northern Rock (Asset Management) plc under the terms of The Northern Rock Transfer Order, SI /3226: m Assets Cash and balances with central banks 9.9 Loans and advances to banks 865.6 Loans and advances to customers 10,343.3 Fair value adjustments of portfolio hedging 160.3 Investment securities and unsecured investment loans 424.0 Intangible assets 23.1 Property, plant and equipment 32.7 Other assets 4.4 Prepayments and accrued income 13.7 Total transferred assets 11,877.0 Liabilities Deposits by banks 235.3 Customer accounts 20,607.6 Other liabilities 19.2 Accruals and deferred income 188.4 Equity Other reserves (16.2) Retained earnings 17.1 Total transferred equity and liabilities 21,051.4 Balance owed by Northern Rock (Asset Management) plc 9,174.4 The amounts transferred are to be recognised in Northern Rock plc in 2010 under the principles of predecessor accounting at book value. There was no profit or loss associated with this transaction. The balance owed by Northern Rock (Asset Management) plc has been paid in full by instalments made to the Company on 4 January, 6 January and 10 February 2010. As part of the transaction, some tax attributes were transferred to the Company; these related to tax losses arising in Northern Rock (Asset Management) plc in earlier accounting periods, certain transitional adjustments arising from the original conversion of the Northern Rock (Asset Management) plc's accounts to IFRS, and capital allowances. In each case, these had no impact on the transfer balance sheet as deferred tax assets were not previously recognised in Northern Rock (Asset Management) plc for these. In addition to the transfer of the assets and liabilities set out above, all employees of Northern Rock (Asset Management) plc transferred to Northern Rock plc on 1 January 2010. The two companies entered into various agreements under which services are provided primarily by Northern Rock plc to Northern Rock (Asset Management) plc. As part of the transfer of assets and liabilities to Northern Rock plc, Northern Rock (Asset Management) plc has agreed to indemnify Northern Rock plc against potential claims arising from past business up to a maximum of 100m. On 1 January 2010 the loan from HM Treasury was used to settle the partly paid shares and the remainder was converted into share capital (see note 8). On 24 February 2010 the Company confirmed that the Government, in consultation with the Financial Services Authority (FSA), completed a review of the retail savings guarantee put in place in September 2007, and concluded that the guarantee could be released subject to the relevant notice period for customers. This reflected Northern Rock s good progress and the Company s strong capital and liquidity position. It also ensures that the Company can compete on the same terms as other banks and building societies for savings. Going forward the Company s retail savers will be covered by the Financial Services Compensation Scheme, which provides up to 50,000 per person. The aim is for there to be full operational separation between the Company and Northern Rock (Asset Management) plc during 2010. 14. Ultimate controlling party Since the share capital is held by the Treasury Solicitor, the Company considers Her Majesty s Government to be the ultimate controlling party. 16