Northern Rock plc, Registered Office: Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL

Registered in England and Wales under Company Number 06952311   www.northernrock.co.uk

CONTENTS
Executive Chairman’s Statement 1
The Board 3
Corporate Governance 4
Directors’ Remuneration Report 8
Corporate Social Responsibility Report 12
Operating and Financial Review 14
Directors’ Report 19
Independent Auditors’ Report
to the Shareholder of Northern Rock plc 22
Consolidated Income Statement 23
Consolidated Statement of Comprehensive Income 24
Consolidated Balance Sheet 25
Company Balance Sheet 26
Consolidated Statement of Changes in Equity 27
Company Statement of Changes in Equity 28
Consolidated Cash Flow Statement 29
Company Cash Flow Statement 30
Notes to the Accounts 31

Presentation of Information
On 17 February 2008, the Chancellor of the Exchequer announced that the Government had decided to take Northern Rock into a period of temporary pub-
lic ownership and on 22 February 2008 the Banking (Special Provisions) Bill received Royal Assent. HM Treasury made an order on 22 February 2008 which
transferred all of the Ordinary, Preference and Foundation Shares in Northern Rock to the Treasury Solicitor as the Treasury’s nominee.
The legislation includes provisions such that Change of Control provisions in any of the Company’s contractual arrangements have not been triggered.
Details of the impact of temporary public ownership are given throughout this Annual Report and Accounts as it affects the Company’s operations and finan-
cial disclosures.
As Northern Rock has previously published financial statements which have been prepared in accordance with EU endorsed International Financial Reporting
Standards (“IFRS”), IFRIC interpretations and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS, it continues to do so.
EXECUTIVE CHAIRMAN’S STATEMENT
Northern Rock plc (the “Company”) commenced trading on
1 January 2010 following completion of the legal and capital
restructuring of the former Northern Rock business, which created
two separate entities:
• Northern Rock plc, a new retail bank authorised by the FSA, and
• Northern Rock (Asset Management) plc (NRAM), now one of
the companies under the control of UK Asset Resolution Limited
Northern Rock plc is authorised and regulated by the Financial
Services Authority (FSA) as a mortgage provider and deposit taker.
The Company remains in Government ownership, but the intention
remains to return it to the private sector when conditions are right
to do so.
FINANCIAL AND OPERATIONAL PERFORMANCE
2010 represented Northern Rock plc’s first year of trading.
The Company has made good progress in its first year and its
financial performance is in line with expectations for the twelve
months to 31 December 2010. Reflecting the low interest
rate environment, along with significant non‑recurring costs, a
loss of £223.5 million was reported for the year, with a loss
of £80.9 million in the second half compared with a loss of
£142.6 million in the first half of the year.
The loss incurred reflects the difficult trading environment for
a small bank, dependent upon retail funding, which continued
throughout 2010. This included the prevailing low interest rate and
subdued mortgage market. The Company also incurred significant
costs relating to the Government’s retail and wholesale guarantees,
which have now been removed, and the high level of liquidity held.
Significant non‑recurring costs were also incurred as the Company
was separated from NRAM. However, the loss in the second half of
the year was £61.7 million less than in the first half demonstrating
that progress is being made.
The Company continued to support capacity in the UK mortgage
market, with gross mortgage lending (including retention
business) during the year of £4.2 billion. Net residential lending
of £1.9 billion in 2010 increased balances to £12.2 billion at
31 December 2010. The quality of new lending remained high,
with an average loan‑to‑value (LTV) ratio of new lending at
62% compared with the average for the book of 59%. Careful
underwriting processes and affordability for customers are key
considerations in our mortgage lending.
Northern Rock plc is predominantly funded by retail deposits. Retail
balances were £16.7 billion at 31 December 2010, compared
with £17.6 billion at 30 June 2010 and remained within the
cap imposed under EC State Aid rules. The reduction in retail
deposit balances over the year is as expected and reflects active
management of the retail savings book, such as the commercial
decision to close the Guernsey savings operation, as well as the
release of the Government’s savings guarantee.
The Government’s guarantee of retail deposits was lifted on
24 May 2010 for variable rate accounts, reflecting the Company’s
strong capital and liquidity position. Fixed rate accounts opened
before 24 February 2010 keep the guarantee for the life of the
product. Northern Rock plc remains a member of the UK Financial
Services Compensation Scheme (FSCS), which provides protection
of up to £85,000 per person for eligible depositors.
Guarantees on certain wholesale deposits of Northern Rock plc
were lifted on 2 November 2010. Fixed term wholesale deposits
existing on 1 January 2010 will retain the guarantee to maturity.
The Company is strongly capitalised, with both a Tier 1 and Total
Capital ratio of 31.6%, and holds a high level of liquidity to support
the retail deposit book and new lending activity.
During the year the workforce was reduced to align the number
of staff with the smaller size of the Company and a lower level
of new business activity. As a result of this, approximately 650
jobs were made redundant. In addition, as part of the separation
of Northern Rock plc from Northern Rock (Asset Management)
plc, approximately 1,250 staff were transferred to Bradford &
Bingley plc.
GOVERNANCE
The Board contains strong banking and operational expertise which
are considered essential to oversee the activities of Northern Rock
plc and its ultimate return to the private sector.
Following the departure of Gary Hoffman as Chief Executive, who
stepped down from the Board on 4 November 2010, I reverted
from Non Executive to Executive Chairman. I was previously
appointed to this role by the Government, in February 2008, when
the former business entered public ownership. The Board and UKFI
considered that this would provide continuity of leadership and
management required at this time.
Rick Hunkin, Chief Risk Officer (CRO), stepped down from the
Board and left the Company on 31 December 2010. Keiran Foad
has been appointed as the new CRO and joined the Company on
1 March 2011.
The Board has five Non Executive Directors; Laurie Adams, Richard
Coates, Mike Fairey, Mark Pain and Mary Phibbs. Jim McConville,
Chief Financial Officer, also sits on the Board as an Executive
Director of the Company.
REMUNERATION
Northern Rock plc needs to attract and retain colleagues with the
appropriate skills and experience to drive company performance
and deliver value for taxpayers. Therefore it is essential that an
appropriate remuneration framework is in place.
For 2010 performance, the Remuneration Committee have agreed a
bonus scheme for all colleagues, including senior management, with
the approval of UKFI. Bonus awards for all colleagues will be made
1
 EXECUTIVE CHAIRMAN’S STATEMENT ­( continued)
in accordance with the FSA Remuneration Code requirements as
appropriate, including relevant deferral conditions.
NORTHERN ROCK IN THE COMMUNITY
Northern Rock has been a substantial contributor to the wider
community over many years, both through the Northern Rock
Foundation and through a wide and varied programme of charitable
work, undertaken by colleagues throughout the business.
During 2010, Northern Rock’s community strategy has been
refocused towards helping communities in financial difficulty,
utilising the skills and experience inherent within the Company.
We have engaged with The Northern Rock Foundation and more
widely to ensure our programme is focused on the areas of
greatest need.
In line with the commitment made when first taken into public
ownership, the Foundation received a donation of £15 million
from NRAM in 2010. Such donations enable the Foundation to
support community and charitable causes, mainly in the North
East of England and Cumbria. Going forward, Northern Rock plc
has entered into a two year rolling agreement to donate 1% of
profits before tax to the Foundation. This maintains the Company’s
commitment to corporate and social responsibility and allows the
Foundation to continue its valuable work.
2
OUTLOOK
Economic conditions remain challenging. The mortgage market in
the UK continues to be relatively subdued, and the interest rate
environment continues to act as a headwind for retail banks and
building societies.
As anticipated, Northern Rock plc was loss making for the full
year but with a significantly improved financial performance in the
second half of 2010. The Board looks forward to the maintenance
of that momentum in 2011, through providing customers with
attractive products and high standards of service, exploring
opportunities for cautiously and prudently expanding the product
range, and continuing to focus on cost control.
A key objective of Northern Rock plc is a return to the private
sector when the time is right, in the taxpayers best interests. The
selection process for corporate finance advisers to work with the
Company and UKFI on the evaluation of strategic options for
Northern Rock is ongoing.
My colleagues across the business remain committed to delivering
the highest standards of service and fair treatment of our customers
and I pay tribute to the quality of what they have delivered.
Ron Sandler
Executive Chairman
8 March 2011
THE BOARD

During 2010, the number of meetings attended by each Director was as follows:
Board Audit Remuneration Risk
Number of meetings held in 2010 16 8 10 8
Executive Chairman
R A Sandler CBE 16/16 10/10

Non – Executive Directors

L P Adams 14/16 10/10 8/8

J R Coates 16/16 8/8 7/8

M A Pain 15/16 6/6 7/8

M C Phibbs 16/16 7/8 7/8

M E Fairey 12/16 4/8 10/10

Executive Directors

G A Hoffman
(resigned 4 November 2010) 13/13

R D Hunkin
(resigned 31 December 2010) 15/16

J McConville
(appointed 8 April 2010) 13/13

During 2010 the Chairman of each Committee was as follows:

Risk Committee – Mr Adams
Audit Committee – Mr Coates
Remuneration Committee – Mr Fairey
Nominations Committee – Mr Sandler.
The Nominations Committee did not meet during 2010. All matters with regard to Board membership and succession were discussed and
agreed at meetings of the Board.
The current membership of the Committees is set out on pages 6 and 7.

3
 CORPORATE GOVERNANCE

The Company’s shares are held by the Treasury Solicitor as
nominee for Her Majesty’s Treasury and consequently, the full
requirements of the UKLA’s Listing Rules and the regulations under
the Companies Act 2006 governing Director’s remuneration
(the Regulations), now known as the UK Corporate Governance
Code (the Code), do not apply to the Company.
This corporate governance section summarises:
• The composition of the Board at the date of this report; and
• The governance regime in place at the date of this report.
The Operating and Financial Review on pages 14 to 18 also
addresses certain governance matters in relation to events in 2010.
COMPOSITION OF THE BOARD
The Directors in office at the date of this report are:
Ron Sandler – Executive Chairman
Ron was Executive Chairman of the former Northern Rock between
February 2008 and October 2008, and was Chairman of that
company until January 2010, when it became Northern Rock
(Asset Management) plc. He was appointed Chairman of Northern
Rock plc in January 2010 and appointed as Executive Chairman
in November 2010. Ron was previously Chief Executive of Lloyd’s
of London from 1995 to 1999, and was subsequently Chief
Operating Officer of Natwest Group. He is Chairman of Phoenix
Group Holdings and Ironshore Inc.
Mary Phibbs – Non‑Executive Director
Mary is a Non-Executive Director and Trustee for the Charity Bank
Limited. She is a Senior Advisor for Alvarez and Marsal and acting
on their behalf as the interim Chief Risk Officer for Allied Irish
Bank. In a 30 year career in Banking and Finance she has held a
variety of senior executive positions with Standard Chartered Bank,
the Australia and New Zealand Bank, the National Australia Bank,
Bankers Trust Australia and the Commonwealth Bank Group. She is
a Chartered Accountant.
Mike Fairey – Non‑Executive Director
Mike was the Deputy Group Chief Executive of Lloyds TSB Group
PLC from 1998 until his retirement in June 2008. Mike is Chairman
of the Lloyds TSB pension funds, a Non‑Executive Director of the
Energy Saving Trust and Vertex Data Sciences and president of the
British Quality Foundation.
Jim McConville – Chief Financial Officer
Jim has more than 20 years experience in the UK retail banking
and insurance sectors, having held a number of senior finance and
strategy related roles in Lloyds Banking Group, including Finance
Director of the Insurance and Investments Division and Scottish
Widows Group. Jim is responsible for Finance and Treasury at
Northern Rock plc.
The Company does not have a Chief Executive at the date of this
report. Mr Hoffman was appointed as Chief Executive on 1 January
2010 and served until his resignation on 4 November 2010.

Laurie Adams – Non‑Executive Director

Laurie is a Non‑Executive Director of Novae Group plc and Citadele
Bank, as the EBRD nominee. He was formerly a Non‑Executive
Director of Siblu Holdings Limited (formerly Haven Europe Limited)
and Managing Director and Global Head of Legal and Compliance of
the Investment Banking Wholesale Division at ABN Amro Bank. He is
a qualified solicitor and mediator.

Richard Coates – Non‑Executive Director

Richard was Managing Director of Baseline Capital Limited from
2003 to 2008, a specialist mortgage data analysis and modelling
organisation. For the previous 30 years he was at KPMG UK, rising
through various appointments to become Senior Partner, UK Head
of Financial Services. He is a Non‑Executive Director for Police
Mutual Assurance Society Limited.

Mark Pain – Non‑Executive Director

Mark is Chairman of London Square Developments (Holdings)
Limited and a Non‑Executive Director of Punch Taverns Plc,
Johnston Press Plc, Aviva Insurance UK Limited, Aviva Life Holdings
UK Limited and LSL Property Services Plc. He is also a trustee at
Somerset House. Mark was previously Group Finance Director of
Barratt Developments Plc, and held a number of senior Executive
and Board positions at Abbey National Plc including Group Finance
Director and Group Sales Director.

4
CORPORATE GOVERNANCE (continued)
GOVERNANCE STRUCTURE
OVERVIEW
Since the restructuring of Northern Rock
on 1 January 2010, the governance has
been regulated principally by a framework
document (the “Framework Document”)
agreed between the Company and UK
Financial Investments Limited (UKFI) as
manager of HM Treasury’s shareholding
in the Company. This sets out how the
relationship between the Company and
UKFI works in practice.
BASIC PRINCIPLES
The basic relationship between the
Company and UKFI operates according to
the following principles under which UKFI:
• Appoints the Chairman of the Board
and is entitled to appoint one or more
Non‑Executive Directors
• Is required to give its consent for the
appointment of other members of the
Board proposed for appointment by
the Nominations Committee and agrees
the terms on which the Directors are
appointed and incentivised
• Agrees with the Board the high level
objectives of the business plan and any
revisions to it
• Reviews with the Board from time to
time the Company’s strategic options
• Requires that the Board is accountable
to it for delivering the agreed business
plan
• Gives the Board the freedom to take
the action necessary to deliver the
business plan
• Monitors the Company’s performance
to satisfy itself that the business plan is
on track
• Must give its consent for certain
significant actions.
IMPLEMENTATION OF BASIC
PRINCIPLES
BOARD STRUCTURE AND GOVERNANCE
In accordance with the Framework
Document, the Company operates a
corporate governance structure which, so
far as practicable and in light of the other
provisions of the Framework Document,
or as otherwise may be agreed with UKFI,
takes appropriate account of best practice
for a company listed on the Official List,
including the Code.
The Board operates the following main
committees:
• Audit Committee
• Risk Committee
• Remuneration Committee
• Nominations Committee.
The work of these committees is
described below.
BOARD APPOINTMENTS AND
MONITORING
It is a key principle of the Framework
Document that UKFI and the Chairman
share a common view about Board
composition (including size, balance
of experience and background) and
succession. To achieve this:
• The Chairman and either the Chairman
of UKFI or a senior employee
nominated by the Chairman of UKFI
(the Nominated Official) will discuss
and confirm Board composition and
succession regularly in the light of
performance and the requirements of
the business plan
• One or more senior representatives
of UKFI will, if so requested by UKFI,
attend meetings of the Board and
Committees in an observer capacity
• The Chairman will discuss with the
Nominated Official any impending
changes to Board membership
• The Chairman of the Nominations
Committee will meet with the
Nominated Official as necessary to
obtain UKFI’s approval to any proposed
Board changes before they become
subject to the formal appointment/
consent procedure
• The Company’s Articles of Association
require that each Director stands for
re‑election at least every three years and
that Directors appointed by the Board
should be subject to election at the first
opportunity after their appointment.
The Directors to retire by rotation
would be those in office longest since
their previous re‑election. Non‑Executive
Directors are appointed for a
specified term subject to re‑election in
accordance with the above procedures
• The Board ensure that suitably rigorous
appraisals are made of the effectiveness
of the Chairman, the Board and its
Committees
• UKFI has certain monitoring and
information access rights, and its
consent has to be obtained for certain
material transactions.
THE BOARD
The Board met 16 times during 2010 and
the details of attendance at the Board and
Committee meetings are given on page 3.
Where Directors were absent from Board or
Committee meetings, on each occasion the
Board or respective Committee was satisfied
with the apologies that were offered.
The Board has a written schedule of matters
reserved for its determination. Reserved
matters include corporate governance
arrangements and the relationship with
UKFI, responsibility for overall management
of the Company’s long‑term objectives and
commercial strategy, financial reporting and
control, setting an appropriate risk appetite
and maintaining a sound system of internal
control and risk management, and the approval
of half yearly, interim management statements
and the Annual Report and Accounts.
BALANCE OF EXECUTIVE AND
NON‑EXECUTIVE DIRECTORS
More than half of the Board comprises
Non‑Executive Directors, all of whom have
experience in a range of commercial or
banking activities.
BOARD COMMITTEES
In accordance with the requirements in
the Framework Document the Board has a
number of Committees. The Chairman and
membership of each Committee are set
out below.
Each Committee has detailed terms of
reference clearly setting out its remit
and authority. The terms of reference
5
 CORPORATE GOVERNANCE (continued)
are regularly reviewed by the Board
and were updated and re‑approved in
September 2010.
The following paragraphs set out details
of the Committees and the particular work
that they undertake.
AUDIT COMMITTEE
The Audit Committee currently comprises
Messrs Coates (Chairman), Pain, Fairey and
Ms Phibbs.
The Committee considers and, where
appropriate, advises the Board on all
matters relating to regulatory, prudential
and accounting requirements that affect
the Company. It reports to the Board on
both financial and non‑financial controls
and monitors the integrity of the financial
statements of the Company and any formal
announcements relating to the Company’s
financial performance. As part of its remit it
oversees anti‑money laundering and whistle
blowing procedures.
An important aspect of its role is to
ensure that an objective and professional
relationship is maintained with the
external auditors. The Audit Committee
has responsibility for recommending the
appointment, re‑appointment and removal
of the external auditors.
The Audit Committee reviews the scope
and results of the annual external audit, its
cost effectiveness, and the independence
and objectivity of the external auditors.
It also reviews the nature and extent of any
non‑audit services provided by the external
auditors. The external auditors can attend
all meetings of the Audit Committee, have
direct access to the Committee and its
Chairman at all times and are invited at
least annually to meet with the Committee
in the absence of management.
The Head of Internal Audit provides further
assurance that the significant risks identified
by the business are properly managed
through attendance at key committees
and delivery of the risk based audit plan.
The Head of Internal Audit also has direct
access to the Audit Committee and its
Chairman. The Committee regularly receives
6
reports of reviews conducted throughout
the Company by the Internal Audit function.
The Audit Committee met eight times
in 2010. In February 2010, the Audit
Committee reviewed and confirmed the
effectiveness of the external auditors.
The external auditors were consequently
re‑appointed at the 2010 Annual General
Meeting until the conclusion of the next
Annual General Meeting.
RISK COMMITTEE
The Risk Committee currently comprises
Messrs Adams (Chairman), Coates, Pain and
Ms Phibbs.
The main role of the Risk Committee is to
review, on behalf of the Board, the key risks
inherent in the business, the systems of
control necessary to manage such risks, and
to present its findings to the Board.
This responsibility requires the Risk Committee
to keep under review the effectiveness of the
Company’s risk management frameworks and
systems of internal control, which includes
financial, operational, compliance and risk
management controls and to foster a culture
that emphasises and demonstrates the benefits
of a risk‑based approach to internal control
and management of the Company. The Risk
Committee fulfils this remit by reinforcing
management’s risk management awareness
and making appropriate recommendations to
the Board on all significant matters relating
to the Company’s risk appetite, strategy and
policies. It is also responsible for considering
the current and prospective macroeconomic
and financial environment.
The Risk Committee regularly reviews reports
from Compliance including regulatory
risks and issues and is also responsible for
approval, and ongoing review and oversight of
progress of the compliance monitoring plan.
The Committee also receives reports from
Compliance in relation to its responsibility to
consider any major findings of the Financial
Services Authority and management’s
response to any risk management review
undertaken by the Chief Risk Officer, Internal
Audit or the external auditors.
The Risk Committee terms of reference
were revised in September 2010 to
delegate to the Committee authority from
the Board to approve new risk policies and
amendments to existing policies. To assist
the Board in discharging its responsibilities
for the setting of risk policy, the Risk
Committee regularly reviews the Company’s
material risk exposures in relation to the
Board’s risk appetite and the Company’s
capital adequacy.
The Risk Committee also ensures that the
public disclosure of information regarding
the Company’s risk management policies
and key risk exposures is in accordance
with statutory requirements and financial
reporting standards.
The Risk Committee met eight times during
2010.
NOMINATIONS COMMITTEE
The Nominations Committee currently
comprises Messrs Sandler (Chairman) and
Adams.
Subject to compliance with the
requirements of the Framework Document
(as set out above), the Committee monitors
and reviews the membership of, and
succession to, the Board of Directors and
the Committee makes recommendations
to the Board in this regard. One of its
functions is to identify potential Executive
and Non‑Executive Directors taking into
account the requirement for the members
of the Board to have an appropriate range
of skills and experience.
The Committee did not meet during 2010
as all matters in relation to the composition
of the Board were considered by the Board.
REMUNERATION COMMITTEE
The Remuneration Committee currently
comprises Messrs Fairey (Chairman),
Sandler and Adams.
Subject to compliance with the requirements
of the Framework Document (as set out
above), the Committee is responsible for
considering and advising the Board on the
remuneration policy for Executive Directors
and the Chairman, and for determining
their remuneration packages. In discharging
its responsibilities, the Remuneration
CORPORATE GOVERNANCE (continued)
Committee can take professional advice from
within and outside the Company.
It is the Board’s responsibility to determine
the remuneration policy for Non‑Executive
Directors within the limits set out in the
Articles of Association. The Remuneration
Committee also determines the level of
remuneration for the Company’s Executive
Committee Directors (comprising management
at the level immediately below the Board).
The Committee met ten times during 2010.
EXECUTIVE COMMITTEE
The Board delegates authority to the
Executive Committee to oversee the
prudent day to day management of
the Company’s affairs. The Committee
comprises Mr Sandler (Executive Chairman),
Ms Belsham (Director of Transition
Management), Mr Fitzpatrick (General
Counsel and Company Secretary), Mr Foad
(Chief Risk Officer), Ms Lauder (Customer
Service & Sales Director), Mr McConville
(Chief Financial Officer), Mr Parker (Chief
Operating Officer), Mr Tate (Customer &
Commercial Director) and Mrs Thompson
(HR Director).
The Committee considers, in the first
instance, all reports made to the Board
and Board Committees, except in relation
to matters reserved to the Board for
its own determination. The function of
the Committee and its sub‑committees,
together with a description of the role and
responsibilities of the Committee members, is
set out in the Executive Governance Manual.
A Delegated Authorities Manual which
specifies the level of authority to be
exercised by the Executive Committee and
various individuals also exists.
The following sub‑committees which report
to the Executive Committee are in place.
• Operating Plan Committee
• Capital Management Committee
• Retail Products and Limits Committee
• Asset and Liability Committee
• Retail Credit Risk Committee
• Operational Risk and Compliance
Committee
• Customer Performance Committee
INDUCTION AND TRAINING
It is the Company’s policy that every Director
should receive appropriate training when
appointed to the Board, and subsequently
as necessary. The Company’s personalised
induction process is designed to ensure
that every new Director understands their
responsibilities as a Director of the Company.
The Board Governance Manual supports this
process. The process also enables Directors
to build an understanding of the Company, its
business and the market in which it operates.
To enable the Board to function effectively,
all Directors have full and timely access to
all information which may be relevant to the
discharge of their duties and obligations. The
Company also arranges additional, specific
training and support for any Director who
requests it. The Chairman ensures that all
Directors are properly briefed on issues to
be discussed at Board meetings. All Directors
are able to obtain further advice or seek
clarity on issues raised at Board meetings
from within the Company or from external
professional sources. All Directors have access
to the advice and services of the Company
Secretary who is responsible for ensuring that
Board procedures and applicable rules and
regulations are observed.
Where necessary, Directors are able to
take independent professional advice at the
Company’s expense.
BOARD EVALUATION
In November 2010, a Board effectiveness
appraisal was conducted by the Chairman
with assistance from the Company
Secretary. All Executive Directors,
Non‑Executive Directors and the Chairman
participated in an evaluation of the Board
and its Committees to ensure that their
operation continued to be of the highest
standard. The evaluation process consisted
of a series of meetings with Directors that
canvassed their views on a wide range of
matters including the effectiveness of the
Board, its Committees and the Chairman. In
addition, the evaluation also considered the
Board meeting process, the composition of
the Board and the interaction between the
Board and its Committees.
The outcome of the evaluation exercise
was reported to the Board and showed
that the Board and its Committees were
discharging their responsibilities effectively.
The appraisal produced a number of
recommendations to further improve
effectiveness of the Board which will be
implemented during 2011.
INTERNAL CONTROL AND RISK
MANAGEMENT
A description of the Company’s approach
to all aspects of financial and other risk
management and the related use of
derivatives is set out in notes 16 and 31 to
the Accounts. Material risk exposures are
maintained within the Board approved risk
appetite and are subject to Board policy
statements which further define specific
exposure limits and controls, appropriate to
each of the risks concerned.
The Board of Directors is responsible for
the Company’s system of risk management,
regulatory compliance and internal control.
The systems are designed to ensure that
the key risks taken by the Company in the
conduct of its business are identified and
evaluated so that appropriate controls are
put in place to manage those risks. Such
systems are designed to manage rather than
eliminate the risk of failure to achieve business
objectives and can only provide reasonable,
but not absolute, assurance against material
misstatement or loss. The Board of Directors
has reviewed the system of internal control
and is not aware of any significant failures in
internal control that arose in the business of
the Company during 2010 and up to the
date of approval of the accounts that have
not been dealt with in accordance with the
internal control procedures of the Company.
The Company’s Internal Audit function
provides a degree of assurance as to the
operation and validity of the system of
internal control through the delivery of a
risk based audit plan. The agreed corrective
actions arising as a result of that plan
are independently monitored for timely
completion.
7
 DIRECTORS’ REMUNERATION REPORT
The issued shares of the Company are
held by the Treasury Solicitor and the
requirements of both the Companies Act
2006 governing disclosure of Directors’
remuneration (the Regulations) and the
UK Corporate Governance Code (the Code)
do not apply to the Company. However,
throughout 2010 and in preparing this
report, the Company has voluntarily
complied in all material respects with both
the Regulations and the provisions of the
Code relating to Directors’ remuneration.
This report is divided into three
sections. The first section reports on
the remuneration policies applied by the
Company during 2010 and the application
of these to specific Directors. The second
section reports on the remuneration
arrangements to be applied by the
Company for 2011. The third section
sets out detail of Directors’ individual
remuneration for 2010.
REMUNERATION POLICIES AND
THEIR APPLICATION TO DIRECTORS
DURING 2010
THE REMUNERATION COMMITTEE
The Remuneration Committee (the
Committee) operated within agreed terms
of reference and consisted of Mr Fairey
(Chairman) and Mr Adams, and the
Chairman of the Company, Mr Sandler.
It met on 10 occasions during 2010.
The Committee was responsible for
making recommendations to the Board
on the Company’s general policy relating
to executive remuneration and for
determining, on behalf of the Board, specific
remuneration packages for the Chairman,
the Executive Directors and the members of
the Executive Committee, being the most
senior tier of management of the Company.
The Chairman and the Chief Executive were
not present when their own remuneration
was under consideration.
The Committee took advice from both
inside and outside the Company on a
range of matters, including the scale and
composition of the total remuneration
package payable in comparable financial
institutions to people with similar
8
qualifications, skills and experience.
The following persons and advisors
provided advice or services to the
Committee during 2010:
• Internal support was provided by
the Company Secretary and Human
Resources Director;
• The Chief Executive (and Executive
Chairman after 4 November 2010)
provided advice in relation to the
Executive Committee members;
• Hewitt New Bridge Street LLP provided
advice on various matters, including
the design of the Long Term Incentive
Scheme which is to be implemented
during 2011;
• Mercer Limited, who are the consulting
actuaries to the Company, advised
on various pension issues relating to
Directors and employees; and
• Freshfields Bruckhaus Deringer
LLP, being the Company’s principal
legal advisers, advised on various
remuneration and service contract
matters and on compliance with the
Regulations.
REMUNERATION POLICIES FOR
EXECUTIVE DIRECTORS
During 2010, the Board adopted a
company-wide remuneration policy with
the aim of attracting, developing and
retaining people with the appropriate
skills, knowledge and expertise to run
the company effectively. This policy
also applied to the Company’s Executive
Directors whose remuneration packages
comprised basic salary, bonus, pension
benefits and certain other benefits in kind.
During the year, Mr Hoffman, Mr Hunkin
and Mr McConville served the Company as
Executive Directors. On 4 November 2010,
Mr Hoffman stood down as Chief Executive
and was placed on “gardening leave” until
30 April 2011 with full contractual benefits
being paid. On 5 November, Mr Hoffman
voluntarily waived all remuneration that
was to be paid to him whilst on “gardening
leave”. No lump sum termination payment
was made to Mr Hoffman. Mr Hunkin
resigned as a Director and left the
Company on 31 December 2010 without
any compensation being paid.
BASIC SALARY:
The Committee’s objective was that
Executive Directors’ basic salaries should be
paid at an appropriately competitive level.
During 2010, the Committee undertook
an extensive benchmarking exercise on
Executive Director remuneration and
concluded that no basic salary increases
should take effect during 2010. Relevant
salary information is as follows:
Mr Hoffman was paid a salary of £700,000
per annum;
Mr Hunkin was paid a salary of £275,000
per annum; and
Mr McConville was paid a salary of
£350,000 per annum.
BONUS SCHEME:
In order to encourage a high performance
culture with close alignment to corporate
values and with the approval of UKFI, the
Committee established a company-wide
bonus scheme for 2010 which linked
a proportion of remuneration to the
performance of the Company.
Under the scheme, the payment of any
bonus was subject to the Company
achieving a financial threshold evidenced by
a sustained improvement in the Company’s
financial and operational performance over
the relevant financial year within a prudent
risk management framework. The quantum
of the bonus pool made available was
determined by the Board following an
assessment of corporate performance
against a series of scorecard objectives
that were set in February 2010.
The level of individual bonus award under
the scheme was based on an assessment of
achievement against personal objectives.
The maximum level of bonus payable to
Executive Directors was 120% of basic
annual salary, with “on target” performance
resulting in a bonus level of 84%.
If individual performance was deemed to be
unacceptable, no bonus was payable.
DIRECTORS’ REMUNERATION REPORT (continued)
Mr McConville received a bonus award of
£185,000. No awards were made to either
Mr Hoffman or Mr Hunkin.
Under the scheme rules, any bonuses
for Executive Directors for the financial
year ended 31 December 2010 will
be paid in accordance with the FSA
Remuneration Code.
PENSION BENEFITS:
The Company paid an amount equal to
40% of Mr Hoffman’s annual salary towards
pension arrangements maintained by him and,
in respect of Mr Hunkin and Mr McConville,
15% of their annual salary towards pension
arrangements maintained by them.
BENEFITS IN KIND:
Executive Directors were also entitled to a
car and fuel allowance and the benefit of
income protection and medical insurance
arranged by the Company on their behalf.
In addition, Mr Hoffman and Mr McConville
were entitled to the reimbursement of
certain accommodation and travel expenses.
EXECUTIVE DIRECTORS’ SERVICE
CONTRACTS
Mr McConville serves under a service
contract dated 14 December 2010.
The contract is terminable by the Company
on 24 months’ notice if notice is served
prior to 8 April 2011 or on 12 months’
notice if served thereafter. Mr McConville
may terminate the contract on giving
6 months notice. Mr McConville’s contract
may be terminated immediately by the
Company on payment of an amount equal
to the salary (excluding other benefits) that
he would have received during his notice
period. The contract contains provisions
under which the termination amount would
be paid in monthly instalments, with such
instalments reduced by an amount equal
to the monthly remuneration derived
by Mr McConville from other activities
commencing during the notice period.
Mr Hoffman served under a service contract
dated 23 July 2008, terminable by either
party on 12 months’ notice given at any
time after 1 October 2009. Mr Hoffman’s
contract contained a provision whereby if
terminated other than for gross misconduct,
he would remain entitled to any outstanding
payments to which he was entitled as
compensation for the loss of his long term
incentive arrangements with his previous
employer (as set out in the footnote to the
Directors’ Individual Remuneration table on
page 11). As referred to above, Mr Hoffman
stood down as Chief Executive and resigned
from the Board on 4 November 2010.
Mr Hunkin served the Company under a
service contract dated 18 August 2008,
terminable by the Company serving
12 months’ notice or by Mr Hunkin
giving 6 months’ notice. Mr Hunkin
resigned as a Director with effect from
31 December 2010.
Under the terms of a services agreement
between Northern Rock (Asset
Management) plc (NRAM) and the
Company dated 7 December 2009, the
Company was required to provide certain
services to NRAM for a period of time
following its restructuring. In accordance
with the services agreement, the Company
invoiced NRAM monthly in arrears for the
cost of services rendered to it plus a margin
of ten per cent. On this basis, 50 per
cent of employment costs relating to
Mr Hoffman, Mr McConville and Mr Hunkin
were charged to NRAM, plus the margin.
POLICY ON EXTERNAL NON-EXECUTIVE
DIRECTORSHIPS HELD BY EXECUTIVE
DIRECTORS
Executive Directors were permitted to hold
one external non-executive directorship
unrelated to the Company’s business,
provided that the time commitment was not
material. Executive Directors were permitted
to retain any fees arising from such a non-
executive directorship. Mr Hoffman was
permitted to continue with all non-executive
directorships held by him at the date of his
appointment to the Board, and to retain
the fees arising from these.
REMUNERATION POLICIES FOR THE
CHAIRMAN AND NON-EXECUTIVE
DIRECTORS
The fees for the Chairman and Non-
Executive Directors described below were
set with reference to external benchmarks
and at levels sufficient to attract the calibre
of individual needed to oversee the strategy
and management of the Company whilst in
Temporary Public Ownership. The Executive
Chairman and the Non-Executive Directors
were entitled to fees from the Company but
were not permitted to participate in bonus,
incentive or pension schemes or receive
benefits in kind, other than reimbursement
for travel and other reasonable expenses
incurred in the furtherance of their
duties and in attending Board and
Committee meetings.
Mr Sandler commenced his appointment
as Non-Executive Chairman on 1 January
2010 and served the Company under a
letter of appointment dated 22 December
2009. On 4 November 2010, Mr Sandler
was appointed Executive Chairman with
no increase to his fee of £250,000 per
annum. Unless otherwise extended by the
Company, his appointment terminates on
31 December 2012 or on either party
serving four months’ notice at any time.
In anticipation of a return to the private
sector, the Company may also provide
notice at any time that it considers
appropriate so that the appointment may
terminate on the day that the Company is
returned to the private sector.
The fees paid to Non-Executive Directors
during 2010 were as follows:
Non-Executive Director’s
Basic Fee £50,000
Additional Fee for Membership
of a Board Committee £5,000
Additional Fee for Chairman
of the Risk Committee £20,000
Additional Fee for Chairman
of other Board Committees £15,000
All Non-Executive Directors referred to
below served under letters of appointment
terminable by either party serving three
9
 DIRECTORS’ REMUNERATION REPORT (continued)
months’ notice at any time. The Company
may also provide notice at any time such
that the appointment may terminate on the
day that the Company is returned to the
private sector.
Set out below are details of the fee
arrangements of the Non-Executive
Directors who served the Company
during 2010:
(a) Mr Adams and Mr Coates were
appointed as Non-Executive Directors
of the Company by letters of
appointment dated 26 November
2009 expiring on 19 November
2011. Mr Adams and Mr Coates were
entitled to the basic fee of £50,000
per annum. Mr Adams was entitled
to an additional fee of £20,000 per
annum for chairing the Risk Committee
and a further additional fee of
£10,000 per annum for membership
of the Remuneration and Nominations
Committee. Mr Coates was entitled
to an additional fee of £15,000 per
annum for chairing the Audit Committee
and a further additional fee of £5,000
for membership of the Risk Committee.
(b) Mr Pain, Ms Phibbs and Mr Fairey
were appointed as Non-Executive
Directors of the Company under letters
of appointment dated 14 December
2009, 11 December 2009 and
14 December 2009, respectively.
The appointments were for a fixed term
of 2 years commencing on 1 January
2010 and expiring on 1 January 2012.
Mr Pain, Ms Phibbs and Mr Fairey were
each entitled to a basic fee of £50,000
per annum. Mr Pain and Ms Phibbs were
entitled to an additional fee of £5,000
per committee per annum in respect
of their membership of each of the
Audit and Risk Committees. Mr Fairey
was entitled to receive an additional
fee of £15,000 as Chairman of the
Remuneration Committee and £5,000
per annum in respect of his membership
of the Audit Committee.
10
REMUNERATION ARRANGEMENTS FOR
THE COMPANY IN 2011
COMPLIANCE
The Company intends to continue to
comply in all material respects with the
relevant regulations and the provisions
of the Code relating to Directors’
remuneration throughout 2011.
THE REMUNERATION COMMITTEE
The Committee will continue to operate
pursuant to its terms of reference
and will remain responsible for making
recommendations to the Board on
the Company’s general policy relating
to executive remuneration and for
determining, on behalf of the Board, specific
remuneration terms for the Chairman and
any Executive Directors employed in the
future. It will also remain responsible for
oversight of the remuneration for Executive
Committee members.
REMUNERATION OF EXECUTIVE
DIRECTORS
During 2011, the remuneration policies
(including the policy on executive service
contracts) will remain closely aligned
to achievement of the objectives of the
business plan.
To reflect the additional responsibilities
undertaken by Mr McConville following the
departure of Mr Hoffman, Mr McConville’s
basic salary will be increased by 10% from
1 January 2011 until either a new CEO is
appointed or the Company exits Temporary
Public Ownership. This additional allowance
is non-pensionable and will not be
taken into account when calculating any
bonus payment that may become due to
Mr McConville.
A bonus scheme will operate in 2011 on
similar terms to that which operated during
2010. The Remuneration Committee
considers that the terms of this bonus
scheme provide an appropriate link between
reward and performance whilst reflecting
emerging best practice relating to bonus
payments. As in 2010, this scheme will
allow Executive Directors to earn up
to 120% of their annual salary if the
maximum level of corporate and individual
performance is achieved. “On target”
performance would allow Executive
Directors to earn up to 84%. Bonuses
will only become payable where the
Board has clear evidence that a sustained
improvement in the Company’s financial and
operational performance within a prudent
risk framework has been achieved over the
course of the year.
In addition to the short term bonus scheme,
the Company will operate a Long Term
Incentive Plan (LTIP) for senior employees
that will deliver financial rewards if the
Company achieves certain targets over
a three year performance period. As the
Company did not make LTIP awards in
2010, it is the Company’s intention to
make awards in 2011 covering 2010 and
2011. The 2010 award will vest in March
2013 and the 2011 award in March 2014,
or upon successful exit from Temporary
Public Ownership, if earlier.
The Remuneration Committee will be
responsible for setting the performance
conditions that will apply to awards made
under this scheme which will include a
financial performance target and a quality of
earnings assessment. The quality of earnings
assessment will seek to establish the extent
to which the financial performance of the
Company over the three year period was
attributable to the efforts of management,
as opposed to external market factors.
At the outset, the Remuneration Committee
will set a “threshold”, “target” and “stretch”
level of financial performance for the
Company, and the LTIP will operate for
Executive Directors as follows:-
• At the “threshold level” of performance,
the LTIP award will be 11.25%;
• At the “target level” of performance,
the LTIP award will be 50% of basic
salary; and
• At the “stretch level” of performance,
the LTIP award will be 75% of
basic salary.
Between these levels of performance,
vesting will occur on a “straight line”
DIRECTORS’ REMUNERATION REPORT (continued)

basis. Application of the “quality of

earnings” assessment by the Remuneration
Committee could cause the LTIP award to
increase or decrease by up to one third.

It has also been agreed that 2010 LTIP

awards for Executive Directors will be
increased by up to 50% to reflect the
additional responsibilities undertaken
following the departure of Mr Hoffman.

REMUNERATION OF THE EXECUTIVE

CHAIRMAN AND NON-EXECUTIVE
DIRECTORS
There will be no change to the fees of the
Chairman and Non-Executive Directors in
2011.

DIRECTORS’ INDIVIDUAL REMUNERATION IN 2010

Details of Directors’ individual remuneration are set out below:
Salary/ Pension 2010 Benefits in Total for
fees contributions Bonus Kind2 Other 2010
£000 £000 £000 £000 £000 £000
Chairman
R A Sandler CBE 250 9 259
Executive Directors
G A Hoffman 591 237 90 4001 1,318
R D Hunkin 275 41 13 329
J McConville 256 38 185 22 153 516
Non‑Executive Directors
L P Adams 80 5 85
J R Coates 70 6 76
M E Fairey 70 5 75
M Pain 60 3 63
M Phibbs 60 7 67

1,712 316 185 160 415 2,788

1 As disclosed in the announcement of his appointment, Mr Hoffman was entitled to three annual payments of £400,000 (less deductions) as compensation for the loss of
entitlements under long term incentive arrangements with his previous employer. The first payment was made on 1 October 2008 and the second made on 25 January 2010,
having been deferred from 1 October 2009. The final payment was due on 1 October 2010 and was paid on 25 October 2010.
2 Benefits in kind includes £27,612 travel and accommodation costs paid to Mr Hoffman plus an associated charge to taxation of £25,121, and £6,853 travel and
accommodation costs paid to Mr McConville plus an associated charge to taxation of £6,853.
3 Mr McConville waived his contractual entitlement to a relocation allowance and was provided with an accommodation allowance of £20,000 for the period from
6 November 2010 to 5 November 2011, of which a portion has been paid in advance.
4 £1,088,000 was reimbursed by Northern Rock (Asset Management) plc to the Company under the Services Agreement pursuant to a provision which entitles the Company
to be reimbursed 50% of the aggregate employment costs relating to Mr Hoffman, Mr McConville and Mr Hunkin plus a margin of 10%.

For 2010, the remuneration of the highest paid Director was £1,081,000 plus personal pension arrangements of £237,000.

M E Fairey
Chairman of the Remuneration Committee
8 March 2011

11
 CORPORATE SOCIAL RESPONSIBILITY REPORT
INTRODUCTION
At Northern Rock plc we recognise
the importance of acting correctly as a
company and as such Corporate Social
Responsibility (CSR) is a fundamental
element of the way we do business.
From the way we treat our customers and
colleagues, work with our suppliers and
engage with our community we believe in
doing our utmost to behave responsibly.
CUSTOMERS
We have over one million customers and
our aim is to offer products and services in
an open, honest and fair way. As our market
and customers’ environment changes we
are investing more time and resource in
understanding customer needs. This is
helping us to design product features and
benefits that respond to these changes
especially in the way that customers want
to purchase from us.
We regularly gauge customer opinion
monitoring satisfaction and advocacy
ratings and also how our brand is perceived
by consumers in general. In addition, we
invest a considerable amount of time and
energy in ensuring that we Treat Customers
Fairly day in, day out. This is demonstrated
in our vision and culture.
BUSINESS ETHICS AND HUMAN
RIGHTS
COMPETITIVE FRAMEWORK
Northern Rock plc is determined to ensure
that it does not take unfair advantage of
Government support during the period
of public ownership. The Company has
agreed to and complied with a revised set
of compensatory measures as part of the
EC State aid process, approval for which
was granted on 28 October 2009, and has
actively managed its product range during
the year to maintain balances and pricing
within the parameters of the measures.
TREASURY
Treasury dealing takes place in accordance
with the rules and guidance in the Financial
Services Authority (FSA) Handbook. Any
treasury dealing outside the detailed scope
of the FSA regulation, such as money
12
market deposits and foreign exchange, is
covered by the Non Investment Products
Code (NIPs Code). This is a voluntary code,
endorsed by the FSA, that lays down what
is generally considered to be good market
practice. The Company does not deal with
counterparties who are on sanctions lists
published by HM Treasury. In addition,
all potential new counterparties, and their
beneficial owners, are reviewed to ensure
they are not classified as Politically Exposed
Persons. We conduct periodic reviews to
assess how our policies, procedures and
practices compare to FSA regulations and
best practice in the NIPs Code.
BETTER PAYMENT PRACTICE
The Company recognises the importance
of making supplier payments on time,
thereby ensuring that our suppliers do
not encounter unnecessary cash flow
problems as a result of late payments
being made. The provisions of the relevant
legislation have been fully communicated
and implemented to ensure that we will
not incur risks to reputation as a result
of non‑compliance. The only invoices not
meeting the agreed payment date should be
those subject to query or dispute.
PENSION SCHEME
The investments of the Company’s pension
schemes are held by the Trustees in pooled
funds. The Trustees expect the managers
of pooled funds used for such purposes to
adhere to the UK Stewardship Code.
WORKPLACE
COLLEAGUE ENGAGEMENT
It is essential that the Company maintains
a highly engaged workforce. It makes our
Company a more attractive place to join,
work in and do business with. It is proven that
those companies with a high engagement
score have colleagues that display pride
and loyalty to the Company which leads
to enhanced performance and improved
customer satisfaction. The benefits can be
reduced absences and sickness, greater job
satisfaction, improved performance and
greater achievement.
To ensure we understand the levels of
colleague engagement we regularly survey
colleagues and the results are used to identify
any areas affecting colleague engagement and
determine required actions.
HEALTH AND SAFETY
HEALTH & SAFETY POLICY
Our Health and Safety Policy is approved
by the Board and includes Executive
responsibility for leadership on Health and
Safety issues.
A comprehensive accident reporting and
investigation process is in place and we
have worked closely with our insurers to
ensure that we continue to apply best
practice. In 2010 there were 2 RIDDOR
reportable accidents. Occupational Health
and Physiotherapy Services are provided
to support colleagues as part of our
attendance management programme.
The work force is predominantly sedentary
in nature. Workstation assessments are
undertaken annually or where a colleague is
relocated. During the year a total of 2,083
workstation assessments were completed
and 56% of these resulted in minor
adjustments or additional equipment being
provided.
ENVIRONMENT
The key environmental impacts arising from
our corporate operations are the use of
energy and water, carbon dioxide emissions
from corporate transport and waste. Where
practical we are committed to ensuring that
environmental awareness and best practice
form an integral part of our decision
making process.
ENERGY
The Company is committed to controlling
the environmental impact from its use of
energy and this is demonstrated by its
accreditation to the “Energy Efficiency
Scheme” which is operated by The
Carbon Trust. This is an area where we seek
continuous improvement and during 2010
“smart meters” have been fitted in all of our
sites. This will improve our ability to manage
consumption by providing on‑line data.
CORPORATE SOCIAL RESPONSIBILITY REPORT (continued)
WASTE
We continue to operate successful recycling
facilities throughout the Company.
We recycle plastic and waxed cups, plastic
bottles and cans, paper, cardboard, toner
cartridges, surplus furniture and waste
electrical equipment.
WATER
We benchmark and target our water use
against the DEFRA corporate environmental
reporting guidance for offices, which is
0.05m3 per employee per working day.
During 2010 our equivalent figure was
0.054m3 per employee (averaged over
the year).
TRAVEL
In 2010 the CO2 emissions per employee
arising from corporate travel (rail, air,
cars/vans for business purposes) was
0.198 tonnes. A corporate travel plan
manager was appointed this year with
responsibility for mitigating our impact
on the environment from corporate and
personal travel with particular reference to
reducing single person car trips to work.
COMMUNITY
THE NORTHERN ROCK FOUNDATION
The Northern Rock Foundation, which
has enjoyed a long relationship with the
former Northern Rock business, supports
community and charitable causes,
mainly in the North East of England and
Cumbria. The Foundation received a
donation of £15 million from Northern
Rock (Asset Management) plc in 2010
and this represented the final payment
under the terms of the original three‑year
commitment made when the former
Northern Rock business entered Temporary
Public Ownership.
Northern Rock plc has entered into a new
two year rolling agreement to donate 1%
of pre tax profits to the Foundation and we
look forward to working together in support
of the many good causes it assists.
Further information on The Northern Rock In addition, our community flagship
Foundation can be obtained from: programme focuses on financial inclusion
in the North East of England with the
The Northern Rock Foundation
objective of making a tangible improvement
The Old Chapel
to the availability of affordable credit
Woodbine Road
and savings products for financially
Gosforth
excluded people in the region. In 2010
Newcastle upon Tyne
we have commenced programmes with
NE3 1DD
South Tyneside Credit Union, the largest
Telephone: 0191 284 8412 community‑based credit union in the
Fax: 0191 284 8413 region, and The Five Lamps Organisation,
Minicom: 0191 284 5411 a Community Development Finance
email: generaloffice@nr‑foundation.org.uk Institution. We provided our time, skills and
expertise to help them build their capability
STAFF MATCHED GIVING and capacity.
The Staff Matched Giving Scheme, which is
funded by the Northern Rock Foundation,
supports individual colleagues who wish to
raise money for, or give money to, UK and
Ireland registered charities or to exempt
and excepted charities. The Foundation
Trustees have set an annual limit of
£500 per person per year.
COLLEAGUE CHOICE OF ANNUAL
CHARITY
The colleague choice of charity for 2010
was Samaritans in line with our focus on
helping communities and individuals in
financial difficulties. One in eight calls to
Samaritans are concerned with financial
difficulty. In 2010, a total of £71,000
was raised by colleagues for Samaritans,
including matching from The Northern Rock
Foundation.
A further £427,000 was also given to a
wide range of national and local charities
and organisations as a result of fundraising
by colleagues over the year. This sum also
includes matched giving from The Northern
Rock Foundation.
COMMUNITY VOLUNTEERING
The volunteering policy allows all Northern
Rock plc colleagues two days per year paid
leave to volunteer for community activity.
In 2010 the programme was refocused
on communities in financial difficulties and
colleagues have volunteered for a number of
good causes which are aligned to this goal
including Samaritans, Crisis and Shelter.
13
 OPERATING AND FINANCIAL REVIEW

OVERVIEW
This is the first set of annual results for Northern Rock plc. The Company was formed through the successful legal and capital restructure of
the former Northern Rock business, which took effect on 1 January 2010 and created two separate trading companies in January 2010 –
Northern Rock plc and Northern Rock (Asset Management) plc (“NRAM”). The restructuring of the former business delivered a capital efficient
structure, providing value for taxpayers by minimising the level of new capital required. It also ensured that Northern Rock plc could continue
to provide new lending and sustain consumer choice following consolidation in the mortgage market.

As a new company, Northern Rock plc did not trade in the period to 31 December 2009 and the comparatives, where shown, reflect this.

KEY POINTS

BUSINESS RESTRUCTURE
• Northern Rock plc made good progress in 2010 – a year of significant restructuring
• The legal and capital restructure was designed to minimise the level of capital required, so providing value for money to taxpayers by
adopting different regulatory frameworks. Whilst Northern Rock plc is regulated as a bank, NRAM (which holds the majority of the
assets of the former company) is regulated as a mortgage provider. This capital efficient structure limited the amount of new capital
required to £1.4 billion

• The restructure created Northern Rock plc, a new, small, highly liquid and well capitalised bank that could continue to provide new
lending and sustain consumer choice following consolidation in the mortgage market

• The Government guarantees for retail savings and wholesale funding were released in 2010, ahead of the original plan

• During the second half of the year, the operational separation of Northern Rock plc from NRAM was completed successfully, enabling
NRAM to be managed alongside Bradford & Bingley plc in UK Asset Resolution Limited

EARNINGS

• The Company’s financial performance is in line with expectations

• For the twelve months to 31 December 2010, the Company reported an underlying loss of £232.4 million. The underlying loss
excludes hedge accounting volatility of £8.9 million, an item which management does not consider to form part of the Company’s
underlying performance

• The statutory loss (including hedge accounting volatility) was £223.5 million. The loss reported reflects the significant costs incurred
relating to the Government’s retail and wholesale guarantees, the high level of liquidity held and other exceptional costs incurred as the
Company was restructured

• It remains a difficult trading environment for a small bank, dependent upon retail funding, with a combination of low interest rates,
subdued mortgage market demand and high competition for retail savings

• The underlying loss in the second half of the year was £92.4 million, compared with an underlying loss of £140.0 million in the first half
of 2010 demonstrating that progress is being made

• During the course of the year, mortgage lending increased and excess liquidity reduced – to the benefit of interest income – and
operating costs were controlled

INCOME

• Total income, including recharges to NRAM, was £104.9 million in 2010. Total income in the second half of the year was £76.4 million,
compared with £28.5 million in the first half

• The improvement in income in part reflected growth of the mortgage book, which resulted in a lower drag from holding surplus liquidity

• Guarantee fees reduced, reflecting the lower level of guaranteed balances following the release of the retail and wholesale guarantees.
This, combined with a reduction in retail savings balances, also improved net interest margin

• The relatively high level of liquidity held – which is invested in low yielding, high quality assets – continues to act as a drag on total income

LENDING AND CREDIT QUALITY

• The Company has continued to support capacity in the mortgage market and offer consumer choice

• Gross residential lending (including retention business) was £4.2 billion in the twelve months to 31 December 2010 and net residential
lending was £1.9 billion
14
OPERATING AND FINANCIAL REVIEW (continued)

• The quality of mortgage lending remains high, with an average loan to value (LTV) for new lending completed during the year of 62%

• The number of mortgage accounts more than three months in arrears at 31 December 2010 represented 0.17% of the book

FUNDING

• Retail deposit balances were £16.7 billion at 31 December 2010, compared with £17.6 billion at 30 June 2010 and £19.5 billion at
the start of 2010

• This reduction was in line with expectations and reflected active management of the savings book to improve margin, including the
closure of the Company’s offshore savings operation in Guernsey

• The Company successfully managed the release of the Government’s 100% guarantee of Northern Rock plc’s retail savings deposits on
24 May 2010, following the announcement by HM Treasury on 24 February 2010

• The decision to remove the Government guarantees reflected the Company’s strong capital and liquidity position and, as a result,
Northern Rock plc competes on the same terms as other banks and building societies who are also members of the Financial Services
Compensation Scheme

• Guarantees relating to wholesale funding were removed in November 2010

COSTS

• Operating expenses in 2010 were £326.5 million, with £155.8 million incurred in the second half of the year, 9% lower than in the
first half

• During 2010, significant costs were incurred in separating Northern Rock plc from NRAM and in ensuring that it has the appropriate
operating structures and capabilities to support the business going forward

• Services provided by Northern Rock plc to NRAM were recharged, with the income from the recharges recognised under fee and
commission income

CAPITAL AND LIQUIDITY

• The Company is strongly capitalised, with both a Tier 1 and Total Capital ratio of 31.6%

• The capital ratio at 30 June 2010 of 37.3% has been restated from the position reported in the half year results due to a change in the
method of calculation agreed with the FSA

• Northern Rock plc holds a high level of liquidity to support the retail deposit book and new lending activity

• Liquid assets of £5.9 billion were held at the end of the year

• The Company’s loan book is fully funded by customer deposits, with a loans to deposits ratio of 72%

FUTURE

• As anticipated, Northern Rock plc was loss-making for the full year. Whilst the Company has made solid progress, a number of factors
continue to affect financial performance

• The relatively high level of liquidity held continues to act as a drag on income and the Company continues to explore ways of deploying
surplus liquidity

• Economic conditions remain challenging. The mortgage market in the UK is relatively subdued, and the interest rate environment
continues to act as a headwind for retail banks and building societies, particularly those funded mainly from retail savings

• Following the separation of Northern Rock plc from NRAM, the Company has entered 2011 with a higher retained cost base than in
2010, when recharges to NRAM for services provided were offset against 2010 operating costs

• Cost management will remain a key area of focus for the Company in 2011 and beyond

• The Company remains committed to its customers, providing them with attractive savings, competitive mortgages and a high standard
of service

• Northern Rock plc continues to be in Government ownership. The Company is being prepared for a return to the private sector, when
conditions are right to do so, in the best interests of taxpayers

• The selection process for corporate finance advisers to work with the Company and UKFI on the evaluation of strategic options for
Northern Rock is ongoing
15
 OPERATING AND FINANCIAL REVIEW (continued)

BUSINESS REVIEW

EARNINGS
The financial performance of the Company for the twelve months to 31 December 2010 was in line with expectations. An underlying loss of
£232.4 million was recorded for the year, which reflects the low interest rate environment along with significant non-recurring costs incurred.

This represents an underlying loss of £92.4 million in the second half of the year, compared with an underlying loss of £140.0 million in the
first half, demonstrating the progress made during the year. On a statutory basis, a loss of £80.9 million was recorded in the second half of
the year, compared with a loss of £142.6 million in the first half of 2010.

The improvement in the second half of the year compared with the first half was driven by an increase in total income, along with a
reduction in both recurring and non‑recurring expenses.

INCOME
Total income in the year to 31 December 2010 was £104.9 million. Total income in the second half of 2010 was £76.4 million, compared
with £28.5 million in the first half.

This improvement in total income was driven by an increase in high quality mortgage lending which replaced some of the lower yield excess
liquidity that the Company held following the legal and capital restructure, as well as a planned reduction in retail deposit balances to
improve margin.

Costs related to the Government’s funding guarantees – which are included within net interest income – amounted to £33.2 million for the
full year, comprising £27.7 million in the first half and £5.5 million in the second half. The reduction in these costs is due to the level of
funding covered by Government guarantees reducing over the course of the year, following the removal of the retail guarantees in May 2010.

As a result of the improvement in income, interest margin improved in the second half of the year. Underlying interest margin (excluding
accounting volatility on derivatives) was (0.28)% for the full year, compared with (0.54)% for the first half of 2010. Interest margin
remains low, however, due to the interest rate environment and the impact of holding high levels of liquidity.

Fee and commission income comprises the income from NRAM and Bradford & Bingley plc relating to the recharge of services provided
under service level agreements, plus commission income generated on sales of third party products such as building and contents insurance
and fees receivable on redemption of mortgages. Fee and commission income was £76.1 million in the second half of the year, 23% lower
than the first half, reflecting the reduction in income from the recharge following the completion of operational separation of Northern Rock
plc from NRAM.

Fee and commission expense represents third party administration and other fees payable not included in interest expense. Fee and
commission expense was £11.3 million in the second half of 2010, 18% lower than the first half mainly reflecting lower treasury and other
fees in the second half.

OPERATING EXPENSES
The Company incurred total operating expenses of £326.5 million during 2010. Of this, £170.7 million was incurred in the first half of
the year and £155.8 million in the second half. Costs were lower in the second half, partly as a result of the separation of NRAM from
Northern Rock plc from NRAM, with associated costs, on 1 November 2010.

The operating expenses figure includes £59.9 million of exceptional expenses (comprising £32.4 million in the first half of the year and
£27.5 million in the second half), which were related to the operational separation of Northern Rock plc from NRAM, and a restructuring
of the Company. This restructuring was necessary in order to align better the number of staff with the smaller size of the Company and
the lower level of new business activity. As a result of this, approximately 650 jobs were made redundant, with compulsory redundancies
avoided where possible.

Following the legal and capital restructure of the former Northern Rock, all employees of the former business (circa 4,500) were transferred
to Northern Rock plc on 1 January 2010. In November 2010, as part of the separation of Northern Rock plc from NRAM, approximately
1,250 employees were transferred to Bradford & Bingley plc. Prior to this, Northern Rock plc incurred the full costs for both Northern Rock
plc and NRAM, with costs allocated between both companies and those relating to NRAM recharged through a service level agreement.
This recharge is recognised within fee and commission income. From November 2010, this recharge reduced reflecting the lower level of
services provided by Northern Rock plc to NRAM following the separation.

Of the £59.9 million total exceptional expenses, £10.3 million related to Northern Rock plc with the balance being recharged to NRAM and
Bradford & Bingley plc.

16
OPERATING AND FINANCIAL REVIEW (continued)

RESIDENTIAL LENDING
An analysis of the movement in residential lending balances is set out in the following table:
£bn
Balance at 1 January 2010 10.3
Gross lending (including retention business) 4.2
Redemptions and repayments (including retention business) (2.3)

Balance at 31 December 2010 12.2

Note: Lending flows represent cash flows excluding fair value adjustments. Balances are stated including fair value adjustments.

Mortgage balances at 31 December 2010 were £12.2 billion, 18% higher than at the start of the year (1 January 2010 – £10.3 billion).
Gross mortgage lending (including retention business) in the second half of 2010 was £2.2 billion, 10% higher than in the first six months of
the year (six months to 30 June 2010 – £2.0 billion). Gross mortgage lending in 2010 included mortgage retention business of £0.6 billion.
Net residential lending was £1.9 billion in 2010.

All mortgage lending is carefully managed with affordability for customers as the key consideration to minimise risk and maximise returns for
taxpayers. The average LTV of new lending in 2010 was 62% (six months to 30 June 2010 – 60%).

CREDIT QUALITY
An analysis of residential arrears is set out in the following table:
31 December 30 June
2010 2010
Cases % Cases %
Over 3 – 6 months 136 0.12 76 0.07
Over 6 – 12 months 51 0.04 5 0.00
Over 12 months 10 0.01 1 0.00

Total 197 0.17 82 0.07

CML average 2.11 2.17

Source: Northern Rock plc and Council of Mortgage Lenders (CML)

Residential mortgage accounts over three months in arrears were 0.17% at 31 December 2010 (30 June 2010 – 0.07%). The low level
of arrears reflects the high quality of the Company’s mortgage balances, with an average indexed LTV on the mortgage book of 59% at
31 December 2010. The stock of unsold repossessed properties was six at 31 December 2010.

The charge for loan loss impairment for 2010 amounted to £1.9 million. The charge in the second half of the year was £1.5 million, compared
with £0.4 million in the first half. The increase in the second half of the year primarily related to enhanced modelling techniques implemented
during that period. Loan loss impairment balances were £2.4 million at 31 December 2010, compared with £0.9 million at 30 June 2010.

FUNDING
An analysis of funding flow and balances is set out in the following table:
Retail Wholesale Total
£m £m £m
2010
Balance at 1 January 2010 19.5 1.3 20.8
Movement in balances (2.8) (1.1) (3.9)

Balance at 31 December 2010 16.7 0.2 16.9

Northern Rock plc is predominantly funded by retail deposits. Retail deposit balances were £16.7 billion at 31 December 2010, compared
with £17.6 billion at 30 June 2010. The reduction in retail deposits balances is as expected and reflects active management of the retail
savings book, such as the decision to close the Guernsey savings operation, as well as release of the Government’s savings guarantee.

17
 OPERATING AND FINANCIAL REVIEW (continued)

Following consultation with the Company and the FSA, on 24 February 2010 HM Treasury announced that it would lift the 100%
guarantee of Northern Rock plc’s retail savings deposits, reflecting the Company’s strong capital and liquidity position. Variable rate
accounts retained the guarantee until 24 May 2010, and fixed rate accounts opened before 24 February 2010 will keep the guarantee for
the life of the product.

As announced in June 2010, the Company decided to close its banking operations in Guernsey following a strategic review. This decision
was taken in order to deliver value to the taxpayer, as the subsidiary no longer met the long‑term commercial objectives of the Company.
All customers were informed of the decision, and the operation was closed in September 2010.

On 2 August 2010, HM Treasury announced that it would lift the guarantees on certain wholesale deposits of Northern Rock plc on
2 November 2010. Fixed term wholesale deposits existing on 1 January 2010 will retain the guarantee to maturity. Wholesale balances
have fallen during the year due to time deposit maturities.

CAPITAL AND LIQUIDITY

The Company is strongly capitalised having received £1.4 billion of equity capital upon completion of the legal and capital restructure at
the start of 2010. As the Company’s capital base is comprised entirely of ordinary share capital, its Tier 1 ratio and Total Capital ratio are
equal at 31.6% at 31 December 2010 (30 June 2010 – 37.3%).

The capital ratio at 30 June 2010 has been restated from the position reported in the half year results due to a change in the method
of calculation agreed with the FSA. Capital requirements are now calculated using the Through the Cycle methodology, which will reduce
volatility in capital requirements going forward. This change does not alter the strength of the capital base of Northern Rock plc – it remains
very well capitalised with capital ratios in excess of industry norms.

The Company held liquid assets of £5.9 billion at 31 December 2010, held in low risk assets such as deposits with the Bank of England.

NORTHERN ROCK IN THE COMMUNITY

Information regarding Northern Rock’s involvement in the community is set out in the Corporate Social Responsibility Report.

FUTURE DEVELOPMENTS
Northern Rock plc remains committed to its customers, providing them with attractive savings, competitive mortgages and a high standard
of service.

While Northern Rock plc remains in Government ownership, the Company continues to prepare the business for an eventual return to the
private sector, when conditions are right to do so, in the best interests of taxpayers. The selection process for corporate finance advisers to
work with the Company and UKFI on the evaluation of strategic options for Northern Rock is ongoing.

The economic environment remains challenging for retail banks in the UK. The mortgage market in the UK is relatively subdued, and the
interest rate environment continues to act as a headwind for retail banks and building societies, particularly for those funded mainly from
retail savings. The relatively high level of liquidity held acts as a drag on income and the Company continues to explore ways of deploying
surplus liquidity.

Following the separation of Northern Rock plc from NRAM, the Company as entered 2011 with a higher retained cost base than in 2010,
when recharges to NRAM for services provided were offset against 2010 operating costs. Cost management will remain a key area of focus
for the Company in 2011 and beyond.

Against this background, Northern Rock plc aims to provide customers with a combination of products and service that positions the
Company as an attractive retail banking alternative, and ultimately deliver value for the taxpayer.

18
DIRECTORS’ REPORT

The Directors present their report and the audited financial statements for the year ended 31 December 2010.

For the purposes of section 417 Companies Act 2006, the information set out under Corporate Governance (pages 4 to 7), the
Corporate Social Responsibility Report (pages 12 and 13) and the Operating and Financial Review (pages 14 to 18) are incorporated by
reference in this report.

PRINCIPAL ACTIVITIES
The principal activities of the Group are discussed in the Operating and Financial Review on pages 14 to 18.

KEY PERFORMANCE INDICATORS

First half Second half Full year
Measure 2010 2010 2010
Gross mortgage lending (including retention business) £2.0bn £2.2bn £4.2bn
Retail deposit balances £17.6bn £16.7bn £16.7bn
Total assets £19.8bn £18.6bn £18.6bn
Administrative expenses and depreciation as a % of mean total assets 1.36% 1.34% 1.35%
Underlying profit/(loss) before tax (£140.0m) (£92.4m) (£232.4m)
Mortgage accounts over 3 months in arrears 0.07% 0.17% 0.17%

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties that the Group faces are as follows:

• Credit risk: 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 Group

• 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
Group

• Liquidity risk: the risk that the Group is unable to meet its obligations as they fall due

• Operational risk: the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events
including legal risk

• Legal risk: the risk of legal sanction, material financial loss or loss to reputation the Group may suffer as a result of its failure to
comply with the law, inadequately document its contractual arrangements or inadequately assess and implement changes required by
forthcoming legislation or emerging case law

• Regulatory risk: the risk of the Group failing to comply with the legal and regulatory requirements applying to its 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

• Northern Rock plc being used for the purposes of financial crime

• Strategic risks: risks to the Group’s Business Plan arising from prolonged low Bank Base Rate, timing of return to sustainable profitability,
double dip recession and timing of exit from Temporary Public Ownership

A review of the management of the principal risks and uncertainties is set out in note 31 to the Accounts.

REVIEW OF BUSINESS AND FUTURE DEVELOPMENTS

A review of the business, future developments and objectives are set out in the Operating and Financial Review on pages 14 to 18 and the
Executive Chairman’s Statement on pages 1 and 2.

19
 DIRECTORS’ REPORT (continued)
DIVIDENDS
The Directors do not propose the
payment of any dividends on the Ordinary
shares in respect of the year ended
31 December 2010.
TANGIBLE FIXED ASSETS
Land and buildings, which are included
in the balance sheet at cost less
accumulated depreciation and impairment
losses, amounted to £16.3 million at
31 December 2010. In the Directors’
opinion, based on valuations carried out by
the Group’s qualified chartered surveyors,
the total market value of land and buildings
at 31 December 2010 was not significantly
different to the carrying value on the
balance sheet.
Details of changes to tangible fixed assets
are included in note 22 to the Accounts.
DIRECTORS
The current composition of the Board of
Directors together with brief biographical
details of each Director is shown on page 4.
The following table shows details of Board
appointments and resignations up to the
date of this report.
J McConville appointed 8 April 2010
G A Hoffman resigned 4 November 2010
R D Hunkin resigned 31 December 2010
Mr Sandler, Mr Adams, Mr Coates, Mr Pain,
Mr Fairey and Ms Phibbs were Directors
of the Company for the year ended
31 December 2010.
No Director had any interest in the shares
of the Company.
The powers of the Directors, along with
provisions relating to their appointment
and replacement, are set out in the Articles
of Association and are also governed by
UK company law. Any alteration to the
Articles of Association must be approved
by shareholders.
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
20
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 Group. 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 a 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.
SHARES
Details of the structure of the Company’s
authorised and issued share capital as at
the year end, as well as any movements in
and changes to the authorised and issued
share capital during the year, are provided
in note 29 to the Accounts.
Further details regarding the rights and
obligations attaching to the current share
classes are contained in the Company’s
Articles of Association.
EMPLOYEES
The Company believes that colleagues
are fundamental to our success and that
capitalising on what is unique about
individuals and drawing on their different
perspectives and experiences will add value
to the way Northern Rock plc does business.
Using fair, objective and innovative
employment practices, the Company’s aim
is to ensure that:
• All colleagues and potential colleagues
are treated fairly and with dignity and
respect at all times;
• All colleagues have the right to be free
from harassment, victimisation and
bullying of any description, or any other
form of unwanted behaviour, whether
based on age; colour of skin; disability;
ethnic origin/race; gender/trans-gender
status; marital/civil partnership status;
sexual orientation, religion or belief;
• All colleagues have an equal
opportunity to contribute to and
achieve their potential, irrespective of
any defining feature that may give rise
to unfair discrimination.
Under the terms of The Northern Rock
Transfer Order 2009, SI 2009/3226
all employees of Northern Rock (Asset
Management) plc were transferred to
Northern Rock plc on 1 January 2010.
As part of the integration of Northern Rock
(Asset Management) plc with Bradford &
Bingley plc (under the UK Asset Resolution
Limited holding company), the Northern
Rock plc employees performing Northern
Rock (Asset Management) plc activities
were transferred to Bradford & Bingley plc
under Transfer of Undertakings (Protection
of Employment) Regulations.
FINANCIAL INSTRUMENTS
The Group’s financial risk management
objectives and policies, including its
governance framework and approach to the
management of key risks including credit
risk, market risk, operational risk, regulatory
risk and liquidity risk, are discussed in
note 31 to the Accounts.
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.
BRANCH OFFICES
As at 31 December 2010 the Company’s
branch network included an office in
DIRECTORS’ REPORT (continued)
Ireland and a subsidiary in Guernsey,
Northern Rock (Guernsey) Limited.
Northern Rock (Guernsey) Limited has
been under the control of the liquidator
since 30 September 2010. Northern Rock
(Guernsey) Limited has reserves of £5.2m
which are being used to pay liquidator fees
and any other expenses that may arise
during liquidation.
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 an agreed
payment period.
The average creditor payment period at
31 December 2010 was 17 days.
SIGNIFICANT AGREEMENTS
The Company, or other members of the
Group, are party to certain non‑material
agreements that contain change of control
provisions in the event of the takeover of
the Company but these are not considered
to be significant on an individual basis.
CHARITABLE CONTRIBUTIONS
Details of charitable contributions relating
to 2010 are included within the Corporate
Social Responsibility Report on pages 12
and 13.
GOING CONCERN
The Directors are satisfied at the time of
approval of the financial statements that
the Group has adequate resources to
continue in business for the foreseeable
future. For this reason, they continue to
adopt the going concern basis in preparing
the accounts.
STATEMENT OF DIRECTORS’
RESPONSIBILITIES
The Directors are responsible for preparing
the Annual 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 Group and not aware. The Directors have taken the
parent company financial statements in steps they need to have taken as Directors
accordance with International Financial to make themselves aware of any relevant
Reporting Standards (IFRSs) as adopted by audit information and to establish that the
the European Union. Under company law auditors are also aware of that information.
the Directors must not approve the financial
By order of the Board
statements unless they are satisfied that
they give a true and fair view of the state J Fitzpatrick,
of affairs of the Group and the Company Company Secretary
and of the profit or loss of the Group for 8 March 2011
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 IFRSs as
adopted by the European Union have
been followed, subject to any material
departures disclosed and explained in
the financial statements.
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
the Group 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 the Group and
hence for taking reasonable steps for the
prevention and detection of fraud and other
irregularities.
The maintenance and integrity of
the Northern Rock plc website is the
responsibility of the Directors.
Legislation in the United Kingdom governing
the preparation and dissemination of
financial statements may differ from
legislation in other jurisdictions.
AUDITORS AND DISCLOSURE OF
INFORMATION TO AUDITORS
So far as every Director at the date of this
report is aware, there is no relevant audit
information needed in preparation of the
auditors’ report of which the auditors are
21
 INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDER OF
NORTHERN ROCK PLC
We have audited the group and parent
company financial statements (the
‘‘financial statements’’) of Northern Rock
plc for the year ended 31 December
2010 which comprise the Consolidated
Income Statement, the Consolidated
Statement of Comprehensive Income,
the Consolidated and Company Balance
Sheets, the Consolidated and Company
Statements of Changes in Equity, the
Consolidated and Company Cash Flow
Statements 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 and, as regards the parent
company financial statements, as applied
in accordance with the provisions of the
Companies Act 2006.
RESPECTIVE RESPONSIBILITIES OF
DIRECTORS AND AUDITORS
As explained more fully in the Directors’
Responsibilities Statement set out on
page 21, 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
and express an opinion on 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 shareholder 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.
22
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 group’s and
parent 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 group’s and
of the parent company’s affairs as at
31 December 2010 and of the group’s
loss and group’s and parent company’s
cash flows for the year then ended;
• the group financial statements have
been properly prepared in accordance
with IFRSs as adopted by the European
Union;
• the parent company financial
statements have been properly
prepared in accordance with IFRSs
as adopted by the European Union
and as applied in accordance with
the provisions of the Companies Act
2006; and
• the financial statements 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 year 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 by the parent company, or
returns adequate for our audit have not
been received from branches not visited
by us; or
• the parent company 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
8 March 2011
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2010

3 July to
31 December
Note 2010 2009
£m £m
Interest and similar income 5 406.8 –
Interest and similar expense 6 (447.8) –

Net interest income / (expense) (41.0) –

Fee and commission income 7 174.6 –
Fee and commission expense (25.1) –
Other operating income 0.8 –
Net trading expense 11 (4.4) –

145.9 –

Total income 104.9 –

Administrative expenses 8 (250.7) –

Depreciation and amortisation (15.9) –
Exceptional restructuring costs 8 (59.9) –

Operating expenses (326.5) –

Impairment losses on loans and advances 10 (1.9) –

Loss before taxation (223.5) –

Taxation 12 – –
Loss for the year attributable to owners (223.5) –

The notes on pages 31 to 64 form an integral part of these financial statements.

23
 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2010

3 July to
31 December
Note 2010 2009
£m £m
Loss for the year attributable to owners (223.5) –
Other comprehensive income
Net movement in available for sale reserve 30 9.3 –
Net movement in cash flow hedge reserve 30 1.4 –
Actuarial gains and losses 9 (0.6) –
10.1 –
Total comprehensive income for the year attributable to owners (213.4) –

24
CONSOLIDATED BALANCE SHEET
At 31 December 2010

Note 2010 2009

£m £m
Assets
Cash and balances with central banks 15 4,646.0 1,400.0
Derivative financial instruments 16 149.0 –
Loans and advances to banks 17 585.2 –
Loans and advances to customers 18 12,197.5 –
Fair value adjustments of portfolio hedging 18 176.9 –
Investment securities 19 661.0 –
Intangible assets 21 11.1 –
Property, plant and equipment 22 34.7 –
Retirement benefit asset 9 3.1 –
Other assets 83.9 0.1
Prepayments and accrued income 13.4 –
Total assets 18,561.8 1,400.1
Liabilities
Loans from HM Treasury 24 – 1,400.0
Deposits by banks 25 0.7 –
Customer accounts 26 16,903.2 –
Derivative financial instruments 16 255.0 –
Other liabilities 43.4 –
Accruals and deferred income 27 164.6 –
Provisions for liabilities and charges 28 7.4 –
17,374.3 1,400.0
Equity
Share capital 29 1,400.0 0.1
Other reserves 30 (5.5) –
Retained earnings (207.0) –
Total equity 1,187.5 0.1
Total equity and liabilities 18,561.8 1,400.1

The notes on pages 31 to 64 form an integral part of these financial statements.

Approved by the Board on 8 March 2011 and signed on its behalf by:
R A Sandler J McConville
Executive Chairman Chief Financial Officer

Northern Rock plc is registered in England and Wales under Company Number 06952311.

25
 COMPANY BALANCE SHEET
At 31 December 2010

Note 2010 2009

£m £m
Assets
Cash and balances with central banks 15 4,646.0 1,400.0
Derivative financial instruments 16 149.0 –
Loans and advances to banks 17 579.7 –
Loans and advances to customers 18 12,197.5 –
Fair value adjustments of portfolio hedging 18 176.9 –
Investment securities 19 661.0 –
Intangible assets 21 11.1 –
Property, plant and equipment 22 34.7 –
Retirement benefit asset 9 3.1 –
Other assets 83.4 0.1
Prepayments and accrued income 13.4 –
Total assets 18,555.8 1,400.1
Liabilities
Loans from HM Treasury 24 – 1,400.0
Deposits by banks 25 0.7 –
Customer accounts 26 16,903.2 –
Derivative financial instruments 16 255.0 –
Other liabilities 42.6 –
Accruals and deferred income 27 164.6 –
Provisions for liabilities and charges 28 7.4 –
17,373.5 1,400.0
Equity
Share capital 29 1,400.0 0.1
Other reserves 30 (5.5) –
Retained earnings (212.2) –
Total equity 1,182.3 0.1
Total equity and liabilities 18,555.8 1,400.1

The notes on pages 31 to 64 form an integral part of these financial statements.

Approved by the Board on 8 March 2011 and signed on its behalf by:
R A Sandler J McConville
Executive Chairman Chief Financial Officer

Northern Rock plc is registered in England and Wales under Company Number 06952311.

26
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2010

Share Other Retained Total

capital reserves earnings equity
Note £m £m £m £m

Balance at 1 January 2010 0.1 – – 0.1

Transfer of reserves from Northern Rock (Asset Management) plc – (16.2) 17.1 0.9
Issuance of ordinary shares 29 1,399.9 – – 1,399.9
Loss for the year – – (223.5) (223.5)
Other comprehensive income
 Net movement in available for sale reserve 30 – 9.3 – 9.3
 Net movement in cash flow hedge reserve 30 – 1.4 – 1.4
 Actuarial gains and losses 9 – – (0.6) (0.6)
Total other comprehensive income – 10.7 (0.6) 10.1
Balance at 31 December 2010 1,400.0 (5.5) (207.0) 1,187.5

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the period 3 July 2009 to 31 December 2009
Share Other Retained Total
capital reserves earnings equity
Note £m £m £m £m

Balance at 3 July 2009 – – – –

Issuance of ordinary shares 29 0.1 – – 0.1
Balance at 31 December 2009 0.1 – – 0.1

27
 COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2010

Share Other Retained Total

capital reserves earnings equity
Note £m £m £m £m

Balance at 1 January 2010 0.1 – – 0.1

Transfer of reserves from Northern Rock (Asset Management) plc – (16.2) – (16.2)
Issuance of ordinary shares 29 1,399.9 – – 1,399.9
Loss for the year – – (211.6) (211.6)
Other comprehensive income
  Net movement in available for sale reserve 30 – 9.3 – 9.3
  Net movement in cash flow hedge reserve 30 – 1.4 – 1.4
  Actuarial gains and losses 9 – – (0.6) (0.6)
Total other comprehensive income – 10.7 (0.6) 10.1
Balance at 31 December 2010 1,400.0 (5.5) (212.2) 1,182.3

COMPANY STATEMENT OF CHANGES IN EQUITY

For the period 3 July 2009 to 31 December 2009
Share Other Retained Total
capital reserves earnings equity
Note £m £m £m £m

Balance at 3 July 2009 – – – –

Issuance of ordinary shares 29 0.1 – – 0.1
Balance at 31 December 2009 0.1 – – 0.1

28
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2010

3 July to
31 December
Note 2010 2009

£m £m
Net cash inflow from operating activities
Loss before taxation (223.5) –
Adjusted for:
Depreciation and amortisation 15.9 –
Impairment losses on loans and advances 10 1.9 –
Fair value adjustments on financial instruments (101.4) –
Other non cash movements (19.3) –
Net cash outflow from operating losses before changes in operating assets and liabilities (326.4) –

Changes in operating assets and liabilities

Net increase in deposits held for regulatory or monetary control purposes (30.1) –
Net increase in loans and advances (12,175.2) –
Net increase in derivative financial instruments receivable (149.0) –
Net increase in other assets (83.8) (0.1)
Net increase in prepayments and accrued income (13.4) –
Net (decrease)/increase in loans from HM Treasury (1,400.0) 1,400.0
Net increase in deposits from other banks 0.7 –
Net increase in amounts due to customers 16,827.7 –
Net increase in derivative financial instruments payable 255.0 –
Net increase in other liabilities 43.4 –
Net increase in accruals and deferred income 164.6 –
Net cash inflow from operating activities 3,113.5 1,399.9

Net cash inflow from investing activities

Net investment in intangible assets (23.8) –
Net investment in property, plant and equipment (37.9) –
Purchase of investment securities (including transfer from Northern Rock (Asset Management) plc) (1,455.4) –
Proceeds from sale and redemption of investment securities 794.8 –

(722.3) –
Net cash outflow from financing activities
Issuance of ordinary shares 1,399.9 0.1
1,399.9 0.1
Net increase in cash and cash equivalents 3,791.1 1,400.0
Opening cash and cash equivalents 1,400.0 –
Closing cash and cash equivalents 34 5,191.1 1,400.0

29
 COMPANY CASH FLOW STATEMENT
For the year ended 31 December 2010

3 July to
31 December
Note 2010 2009

£m £m
Net cash inflow from operating activities
Loss before taxation (211.6) –
Adjusted for:
Depreciation and amortisation 15.9 –
Impairment losses on loans and advances 10 1.9 –
Fair value adjustments on financial instruments (101.4) –
Other non cash movements (36.4) –

Net cash outflow from operating losses before changes in operating assets and liabilities (331.6) –

Changes in operating assets and liabilities

Net increase in deposits held for regulatory or monetary control purposes (30.1) –
Net increase in loans and advances (12,175.2) –
Net increase in derivative financial instruments receivable (149.0) –
Net increase in other assets (83.3) (0.1)
Net increase in prepayments and accrued income (13.4) –
Net (decrease)/increase in loans from HM Treasury (1,400.0) 1,400.0
Net increase in deposits from other banks 0.7 –
Net increase in amounts due to customers 16,827.7 –
Net increase in derivative financial instruments payable 255.0 –
Net increase in other liabilities 42.6 –
Net increase in accruals and deferred income 164.6 –
Net cash inflow from operating activities 3,108.0 1,399.9

Net cash inflow from investing activities

Net investment in intangible assets (23.8) –
Net investment in property, plant and equipment (37.9) –
Purchase of investment securities (including transfer from Northern Rock (Asset Management) plc) (1,455.4) –
Proceeds from sale and redemption of investment securities 794.8 –
(722.3) –
Net cash outflow from financing activities
Issuance of ordinary shares 1,399.9 0.1
1,399.9 0.1
Net increase in cash and cash equivalents 3,785.6 1,400.0
Opening cash and cash equivalents 1,400.0 –
Closing cash and cash equivalents 34 5,185.6 1,400.0

30
NOTES TO THE ACCOUNTS

1. Basis of preparation
The financial statements have been prepared on a going concern basis.
Northern Rock plc (Northern Rock, the Company, the Group) was incorporated on 3 July 2009 as Gosforth Subsidiary No. 1 Limited, a company domiciled in the
United Kingdom. The Company changed its name to Gosforth Subsidiary No. 1 plc on 10 November 2009 and then to Northern Rock plc on 31 December 2009
ahead of the legal and capital restructure of the former Northern Rock, which subsequently took place on 1 January 2010.
The Company did not trade in the period to 31 December 2009. On 1 January 2010 Northern Rock plc became a savings and mortgage bank under the terms
of the Statutory Instrument 2009/3226 (“The Northern Rock Transfer Order”), which was a legal and capital restructuring of Northern Rock into two companies.
Under the terms of this order Northern Rock plc acquired certain elements of the business of Northern Rock (Asset Management) plc, including its entire retail
savings book of £19.5 billion and a residential mortgage book of £10.3 billion.

2. Principal accounting policies

a) Accounting convention
These financial statements have been prepared in accordance with EU endorsed International Financial Reporting Standards (“IFRS”), 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 as modified by the revaluation of available for sale investments, financial assets and liabilities held at fair value. A summary of the more important
group 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 (see note 4).

b) Basis of consolidation
The financial information of the Group incorporates the assets, liabilities and results of Northern Rock plc and its subsidiary undertakings (including Special
Purpose Entities). Entities are regarded as subsidiaries where the Group has the power to govern financial and operating policies so as to obtain benefits from
their activities. Inter-company transactions and balances are eliminated upon consolidation.
Subsidiaries are consolidated from the date on which control is transferred from the Group and are deconsolidated from the date that control ceases. Uniform
accounting policies are applied consistently across the Group.

c) Interest income and expense

Interest income and expense are recognised in the income statement for all instruments measured at amortised cost using the effective interest method.
The effective interest method calculates the amortised cost of a financial asset or a financial liability, and allocates the interest income or interest expense over
the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the
financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective
interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example prepayment options) but does not
consider future credit losses. The calculation includes all amounts received or paid by the Group that are an integral part of the overall return, direct incremental
transaction costs related to the acquisition or issue of a financial instrument and all other premiums and discounts.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate
of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

d) Fees and commissions

Where they are not included in the effective interest calculation, fees and commissions are generally recognised on an accruals basis when the service has been
provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related incremental direct costs) and recognised as an
adjustment to the effective interest rate on the loan. Insurance commissions are recognised in the period in which they are earned.

e) Financial instruments
Financial assets can be classified in the following categories: loans and receivables, available for sale, held to maturity or financial assets at fair value through
profit and loss. Management determines the classification of its financial instruments at initial recognition. The Group measures all of its financial liabilities at
amortised cost, other than derivatives and those instruments which have been designated as part of a hedging relationship (see below). Regular way purchases
and sales of financial assets at fair value through profit or loss, held to maturity and available for sale are recognised on trade date – the date on which the Group
commits to purchase or sell the asset.
i) Loans and receivables and financial liabilities at amortised cost
The Group’s loans and advances to banks and customers are classified as loans and receivables. Loans and receivables are non-derivative financial assets
with fixed or determinable payments that are not quoted in an active market, whose recoverability is based solely on the credit risk of the customer and
where the Group has no intention of trading the loan. Both loans and receivables and financial liabilities are initially recognised at fair value including direct
and incremental transaction costs. Subsequent recognition is at amortised cost using the effective interest method, less any provision for impairment.
ii) Available for sale financial assets
Available for sale financial assets are assets that are either designated as available for sale or are assets that do not meet the definition of loans and
receivables and are not derivatives or assets held at fair value through profit and loss. These are principally but not exclusively investment securities
intended to be held for an indefinite period of time which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or
equity prices. They are initially measured at fair value including direct and incremental transaction costs. Subsequent measurement is at fair value, with
changes in fair value being recognised in equity except for impairment losses and translation differences, which are recognised in the income statement.
Upon derecognition of the asset, or where there is objective evidence that the investment security is impaired, the cumulative gains and losses recognised
in equity are removed from equity and recycled to the income statement.
iii) Held to maturity financial assets
Held to maturity financial assets are non-derivative financial assets with fixed or determinable payments that the Group has the ability and intention to hold
to maturity. They are initially measured at fair value including direct and incremental transaction costs. Subsequent measurement is at amortised cost using
the effective interest method. No financial assets were classified as held to maturity during either 2010 or 2009.

31
 NOTES TO THE ACCOUNTS (continued)

2. Principal accounting policies (continued)

iv) Financial assets and liabilities at fair value through profit or loss
A financial asset or liability is classified in this category if it is held for trading or is so designated by management on initial recognition. A financial asset
or liability is classified as held for trading if it is a derivative not in an IAS 39 compliant accounting hedge relationship, or if it is acquired for the purpose of
selling or repurchasing in the near term. In certain circumstances other assets and liabilities may be designated as held at fair value through profit or loss
on initial recognition. These are when:
a) Doing so significantly reduces measurement inconsistencies that would arise if the asset or liability were carried at amortised cost but a related
derivative was treated as held for trading;
b) Certain investments are managed and evaluated on a fair value basis in accordance with a documented risk management strategy and are reported to
management on that basis;
c) Financial instruments contain significant embedded derivatives that significantly modify the cash flows from the instruments.
The assets are initially measured at fair value, with transaction costs taken directly to the income statement. Subsequent measurement is at fair value including
interest cash flows and accruals, with changes in fair value included directly in the income statement within other income, except for derivative instruments
where interest cash flows and accruals are recorded within net interest income.
The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities),
the Group establishes fair value using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis, option
pricing models and other valuation techniques commonly used by market participants.
No financial assets or liabilities were held at fair value through the income statement in 2010.

f) Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised
amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

g) Derivative financial instruments and hedge accounting

The Group is authorised to undertake the following types of derivative financial instrument transactions for non-trading purposes: cross currency swaps, interest
rate swaps, equity swaps, interest rate caps, forward rate agreements, options, foreign exchange contracts and similar instruments.
The Group’s derivative activities are entered into for the purpose of matching or eliminating risk from potential movements in interest and foreign exchange
rates inherent in the Group’s assets, liabilities and positions. All derivative transactions are for economic hedging purposes and so it is therefore decided at
the outset which position the derivative will be hedging. Derivatives are reviewed regularly for their effectiveness as hedges and corrective action taken, if
appropriate. Derivatives are measured initially at fair value and subsequently remeasured to fair value. Fair values are obtained from quoted market prices
in active markets and, where these are not available, from valuation techniques including discounted cash flow models and option pricing models. Where
derivatives are not designated as part of a hedging relationship, changes in fair value are recorded in the income statement. Where derivatives are designated
within hedging relationships, the treatment of the changes in fair value depends on the nature of the hedging relationship as explained below.
Hedge accounting is used for derivatives designated in this way provided certain criteria are met. The Group documents at inception of the hedge relationship
the link between the hedging instrument and the hedged item as well as its risk management objective and strategy for undertaking various hedge transactions.
The Group also documents its assessment both at hedge inception and on an ongoing basis of whether the derivatives used in hedging transactions are highly
effective in offsetting changes in the fair values or cash flows of hedged items.
i) Cash flow hedges
A cash flow hedge is used to hedge exposures to variability in cash flows, such as variable rate financial assets and liabilities. The effective portion of changes
in the derivative fair value is recognised in equity, and recycled to the income statement in the periods when the hedged item will affect profit and loss. The
fair value gain or loss relating to the ineffective portion is recognised immediately in the income statement.
ii) Fair value hedges
A fair value hedge is used to hedge exposures to variability in the fair value of financial assets and liabilities, such as fixed rate loans. Changes in fair value
of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the
carrying amount of the hedged item is amortised to the income statement over the period to maturity.
If derivatives are not designated as hedges then changes in fair values are recognised immediately in the income statement.
iii) Embedded derivatives
Certain derivatives are embedded within other non-derivative host instruments to create a hybrid instrument. Where the economic characteristics and risks
of the embedded derivatives are not closely related to the economic characteristics and risk of the host instrument, and where the hybrid instrument is not
measured at fair value, the Group separates the embedded derivative from the host instrument and measures it at fair value with the changes in fair value
recognised in the income statement.

h) Sale and repurchase agreements

Securities sold subject to repurchase agreements (‘repos’) are reclassified in the financial statements as assets pledged when the transferee has the right by
contract or custom to sell or repledge the collateral; the counterparty liability is included in amounts due to other banks, deposits from banks, other deposits
or deposits due to customers, as appropriate. Securities purchased under agreements to resell, (‘reverse repos’), are recorded as loans and advances to banks or
customers as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective
interest method. Securities lent to counterparties are also retained in the financial statements.

i) Impairment losses
The Group assesses its financial assets or groups of financial assets for objective evidence of impairment at each balance sheet date. An impairment loss
is recognised if, and only if, there is a loss event (or events) that has occurred after initial recognition and before the balance sheet date and has a reliably
measurable impact on the estimated future cash flows of the financial assets or groups of financial assets. Losses that are incurred as a result of events occurring
after the balance sheet date are not recognised in these financial statements.

32
NOTES TO THE ACCOUNTS (continued)

2. Principal accounting policies (continued)

i) Assets held at amortised cost
The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or
collectively for financial assets that are not individually significant. Objective evidence that a financial asset is impaired includes observable data that comes
to the attention of the Group about the following loss events:
a) significant financial difficulty of the issuer or obligor;
b) a breach of contract, such as a default or delinquency in interest or principal repayments;
c) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not
otherwise consider;
d) it becomes probable that the borrower will enter bankruptcy or other financial reorganisation;
e) the disappearance of an active market for that financial asset because of financial difficulties; or
f) observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of assets since the initial recognition
of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:
i. adverse changes in the payment status of borrowers in the portfolio;
ii. national or local economic conditions that correlate with defaults on the assets in the portfolio.
If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it
includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are
individually assessed and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss on loans and receivables has been incurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been
incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an
impairment allowance and the amount of the loss is recognised in the income statement. In future periods the unwind of the discount is recognised
within interest income.
When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary
procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease
the amount of the provision for loan impairment in the income statement. If, in a subsequent period, the amount of the impairment loss decreases and
the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the customer’s credit
rating), the previously recognised impairment loss is reversed by adjusting the impairment allowance. The amount of the reversal is recognised in the
income statement.
ii) Available for sale financial assets
For available for sale financial assets, the Group assesses at each balance sheet date whether there is objective evidence that a financial asset, or group
of financial assets are impaired. The amount of the loss is measured as the difference between the asset’s acquisition cost less principal repayments and
amortisation and the current fair value. The amount of the impairment loss is recognised in the income statement. This includes cumulative gains and losses
previously recognised in equity which are recycled from equity to the income statement. If, in a subsequent period, the fair value of a debt instrument
classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit
or loss, the impairment loss is reversed through the income statement.
iii) Renegotiated loans
Loans to customers whose terms have been renegotiated are no longer considered past due but are treated as fully performing loans only after at least
three monthly payments under the new arrangements have been received. In subsequent years, the asset is considered to be past due and disclosed only
if renegotiated again within that year.

j) Derecognition of financial assets and liabilities

Derecognition is the point at which the Group removes an asset or liability from its balance sheet. The Group’s policy is to derecognise financial assets only when
the contractual right to the cash flows from the financial asset expires. The Group also derecognises financial assets that it transfers to another party provided
the transfer of the asset also transfers the right to receive the cash flows of the financial asset or where the Group has transferred substantially all the risks and
rewards of ownership. Where the transfer does not result in the Group transferring the right to receive the cash flows of the financial assets, but it does result in
the Group assuming a corresponding obligation to pay the cash flows to another recipient, the financial assets are also accordingly derecognised.
The Group derecognises financial liabilities only when the obligation specified in the contract is discharged, cancelled or has expired.

k) Securitisation transactions
The Group has entered into self issuance of securitised debt which may be used as collateral for repurchase or similar transactions. Investments in self issued
debt and the equivalent deemed loan, together with the related income, expense and cash flows, are not recognised in the financial statements.

l) Foreign currency translation

The Group’s financial statements are presented in sterling, which is the functional currency of the parent company.
Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the dates of the transactions. Monetary items
denominated in foreign currencies are translated at the rate prevailing at the balance sheet date. Foreign exchange gains and losses resulting from the
restatement and settlement of such transactions are recognised in the income statement. Non-monetary items measured at amortised cost and denominated in
foreign currencies are translated at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are translated at the exchange
rate at the date of valuation. Where these are held at fair value through the income statement, exchange differences are reported as part of the fair value gain
or loss.

m) Intangible assets
Computer software
Costs incurred in acquiring and developing computer software for internal use are capitalised as intangible assets where the software leads to the creation of
an identifiable non-monetary asset and it is probable that the expected future economic benefits that are attributable to the asset will flow to the Group from
its use for a period of over one year. The software is classified as an intangible asset where it is not an integral part of the related hardware and amortised over
its estimated useful life on a straight line basis which is generally 3 to 5 years.
Costs associated with maintaining software are expensed as they are incurred.

33
 NOTES TO THE ACCOUNTS (continued)

2. Principal accounting policies (continued)

n) Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition,
including cash and non-restricted balances with central banks.

o) 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 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.
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, the carry forward of unused losses, 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.
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.

p) Pensions and employee benefits

In 2010, the Company operated the Northern Rock (2010) Pension Scheme (the “Scheme”) to provide retirement benefits for staff. The Scheme had defined
benefit and defined contribution sections. Staff who joined the previous scheme, the Northern Rock Pension Scheme, before 1 July 1999 participated in the
funded, contracted out, defined benefit section of the Scheme unless they opted out. Other staff, including those employed at 1 July 1999 but not members of
the defined benefit section at that date, together with staff employed from 1 July 1999, participated in the defined contribution section of the scheme unless
they opted out. The assets of both sections of the Scheme are held in a trustee-administered fund separate from the assets of Northern Rock plc.
In June 2010 it was announced that the defined benefit section would be closed to future accrual effective from 1 January 2011. In addition no further
contributions could be made to the defined contribution section of the Scheme from the same date. All employees have transferred to the Northern Rock (2011)
Pension Scheme which has a defined contribution section only.
A full actuarial valuation of the Group’s defined benefit section of the Scheme is undertaken every three years with interim reviews in the intervening years; these
valuations are updated to 31 December each year by qualified independent actuaries. For the purpose of these annual updates, Scheme assets are included
at their fair value and Scheme liabilities are measured on an actuarial basis using the projected unit credit method. Liabilities in the defined benefit section of
the Scheme are discounted using rates equivalent to the market yields at the balance sheet date on high quality corporate bonds that are denominated in the
currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. The resulting net surplus
or deficit is included in the Group’s balance sheet. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the
future or through refunds from the Scheme.
The Group’s income statement includes the current service cost of providing pension benefits, the expected return on the Scheme’s assets, net of administration
costs, and the interest cost on the Scheme’s liabilities. Cumulative actuarial gains and losses arising from experience adjustments and changes in actuarial
assumptions are recognised immediately through other comprehensive income.
Past service costs are recognised immediately in the income statement, unless the changes to the Scheme are conditional on the employees remaining in service
for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight line basis over the average vesting period.
For defined contribution plans, the Company has no further payment obligations once the contributions have been paid. The contributions are recognised as
an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future
payments is available.

q) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and provision for impairment, as appropriate. Cost includes the original
purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Additions and subsequent expenditure
are included in the asset’s carrying value or are recognised as a separate asset only when they improve the expected future economic benefits to be derived
from the asset. All other repairs and maintenance are charged to the income statement in the period in which they are incurred.
Depreciation is provided using the straight line method to allocate costs less residual values over estimated useful lives, as follows:
Freehold property 100 years
Leasehold property Unexpired period of the lease
Plant, equipment, fixtures and fittings
– plant 30 years
– furniture 10 years
– other 5 years
Computer equipment
– PCs 3 years
– other 5 years
Motor vehicles 4 years
Assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

34
NOTES TO THE ACCOUNTS (continued)

2. Principal accounting policies (continued)

Where the cost of freehold land can be identified separately from buildings, the land value is not depreciated. Fixed assets are subject to impairment testing, if
deemed appropriate.

r) Impairment of property, plant and equipment and intangible assets

Property, plant and equipment and intangible assets are assessed for indications of impairment at each balance sheet date, or more frequently where required by
events or changes in circumstances. If indications of impairment are found, these assets are subject to an impairment review. The impairment review compares
the carrying value of the assets with their recoverable amounts, which are defined as the higher of the net selling price and their value in use. Net selling price
is the amount at which the asset could be sold in a binding agreement in an arm’s length transaction. Value in use is calculated as the discounted cash flows
generated as a result of the asset’s continued use including those generated by its ultimate disposal, discounted at a market rate of interest on a pre-tax basis.
Where impairments are indicated, the carrying values of fixed assets are written down by the amount of the impairment and the charge is recognised in the
income statement in the period in which it occurs. A previously recognised impairment charge on a fixed asset may be reversed in full or in part where a change
in circumstances leads to a change in the estimates used to determine its recoverable amount. The carrying value of the fixed asset will only be increased to the
carrying value at which it would have been held had the impairment not been recognised.

s) Leases
If the lease agreement, in which the Group is a lessee, transfers the risks and rewards of the asset, the lease is recorded as a finance lease and the related asset
is capitalised. At inception, the asset is recorded at the lower of the present value of the minimum lease payments or fair value and is depreciated over the
estimated useful life. The lease obligations are recorded as borrowings.
If the lease does not transfer the risks and rewards of the asset, the lease is recorded as an operating lease.
Operating lease payments are charged to the income statement on a straight line basis unless a different systematic basis is more appropriate. Where an
operating lease is terminated before the lease period has expired, any payment required to be made to the lessor in compensation is charged to the income
statement in the period in which termination is made.

t) Provisions
Provisions are recognised for present obligations arising from past events where it is more likely than not that outflows of resources will be required to settle
the obligations and they can be reliably estimated.
Contingent liabilities are possible obligations whose existence depends upon the outcome of uncertain future events or are present obligations where the
outflows of resources are uncertain or cannot be reliably measured. Contingent liabilities are not recognised in the financial statements but are disclosed unless
they are remote.

u) Share capital
i) Share issue costs
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
ii) Dividends on shares
Dividends on shares are recognised in equity in the period in which they are approved by the Company’s shareholders or paid.

v) Implementation of new standards and amendments to published standards and interpretations effective during 2010
The following new standards, amendments to standards or interpretations are also mandatory for the first time for financial years during 2010 and have been
endorsed for adoption by the EU, but have no material financial impact on the Group. These are applicable from 1 January 2010 unless otherwise stated:
•• IFRS 2, Share-based payment – Group cash-settled share-based payment transactions
•• Improvements to IFRSs (2009)
•• Amendments to IFRS 1, on first time adoption of IFRS additional exemptions.

w) Standards, interpretations and amendments to published standards that are not yet effective and the early adoption of standards
The Group has not early adopted any standards or interpretations during 2010.
The following new standards, amendments to standards or interpretations that are relevant to the Group have been issued and have been endorsed by the EU
but are not effective for financial years beginning 1 January 2010:
•• Amendment to IAS 24, Related party disclosures
The following new standards, amendments to standards or interpretations that are relevant to the Group have been issued but are not effective for financial
years beginning 1 January 2010 and have not been endorsed by the EU:
•• Annual improvements 2010
•• IFRS 9, Financial instruments
•• Amendment to IFRS 7, Financial Instruments: Disclosures on derecognition
The following new standards, amendments to standards or interpretations are not effective for financial years beginning 1 January 2010 and have been
endorsed by the EU, but have no material impact on the Group:
•• Amendment to IFRIC 14, IAS 19 – Prepayments of a minimum funding requirement
•• Amendment to IAS 32 Financial instruments: Presentation on classification of rights issues
•• Amendment to IFRS 1, First time adoption of IFRS
•• IFRIC 19, Extinguishing financial liabilities with equity instruments

35
 NOTES TO THE ACCOUNTS (continued)

3. Transfer of assets and liabilities

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 2009, SI 2009/3226:

£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 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 were recognised in Northern Rock plc 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 was 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 29).
On 24 February 2010 the Company confirmed that the Government, in consultation with the Financial Services Authority (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 for customers.
This reflected Northern Rock plc’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 are covered by the Financial Services Compensation
Scheme, which, from 31 December 2010, provides up to £85,000 per person (see note 31).

4. Critical accounting estimates

a) Impairment losses on loans and advances

Individual impairment losses on loans and advances are calculated based on an individual valuation of the underlying asset. Collective impairment losses on
loans and advances are calculated using a statistical model. The key assumptions used in the model are the probability of any balance entering into default in the
next twelve months as a result of an event that had occurred prior to the balance sheet date; the probability of this default resulting in possession or write off;
and the subsequent loss incurred. These key assumptions are based on observed data trends and are updated on a monthly basis within agreed methodology
to ensure the impairment allowance is entirely reflective of the current portfolio. The accuracy of the impairment calculation would therefore be affected by
unanticipated changes to the economic situation and assumptions which differ from actual outcomes. To the extent that the loss given default differs by
+/- 10%, the impairment allowance would be an estimated £0.2m higher or £0.2m lower respectively.

36
NOTES TO THE ACCOUNTS (continued)

4. Critical accounting estimates (continued)

b) Fair value calculations

Fair value is defined as the value at which assets, liabilities or positions could be closed out or sold in a transaction with a willing and knowledgeable
counterparty. For the majority of instruments carried at fair value, these are determined by reference to quoted market prices. Where these are not available,
fair value is based upon cash flow models, which use wherever possible independently sourced market parameters such as interest rate yield curves, currency
rates and option volatilities. Other factors are also considered, such as counterparty credit quality and liquidity. Management must use judgement and estimates
where not all necessary data can be externally sourced or where factors specific to Northern Rock plc’s holdings need to be considered. The accuracy of the
fair value calculations would therefore be affected by unexpected market movements, inaccuracies within the models used compared to actual outcomes
and incorrect assumptions. For example, if management were to use a tightening in the credit spread of 10 basis points, the fair values of liabilities (including
derivatives) would increase from the reported fair values by £1.5m.

c) Average life of secured lending

IAS 39 requires interest earned from mortgage lending to be measured under the effective interest method. The effective interest rate is the rate that exactly
discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when appropriate, a shorter period to the net
carrying amount of the financial asset.
Management must therefore use judgement to estimate the expected life of each instrument and hence the expected cash flows relating to it. The accuracy of
the effective interest rate would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models
used compared to actual outcomes and incorrect assumptions. If the estimated average life of secured loans were increased or reduced by one month, the value
of such loans on the balance sheet would be increased or decreased by £3.9m and £3.6m respectively.

d) Pension benefits
The present value of the pension obligations is dependent upon an actuarial calculation which includes a number of assumptions. These assumptions include
the discount rate, which is used to determine the present value of the estimated future cash outflows that will be required to meet the pension obligation. In
determining the appropriate discount rate to use, the Group considers market yields of high quality corporate bonds denominated in sterling that have terms to
maturity approximating the terms of the pension liability. Were this discount rate to reduce by 0.1% or increase by 0.1% from the current management estimate,
the carrying value of the pension obligations would be an estimated £0.2m higher or £0.2m lower respectively.
Other key assumptions for pensions benefits including mortality tables are based in part upon current market conditions or published data. Additional
information is included in note 9.

e) Unrecognised deferred tax assets

Significant management judgement is required to determine the amount of deferred tax assets that can be recognised. Management reassesses unrecognised
deferred tax assets at each balance sheet date. Based on their interpretation of the timing and level of reversal of existing taxable temporary differences, in line
with relevant accounting standards, management have concluded that it is not appropriate to recognise a deferred tax asset at the balance sheet date. The
amount of unrecognised deferred tax assets at 31 December 2010 was £259.1m (2009: £nil) in both the Group and Company.
Management will closely monitor the opportunities for the recoverability of these deferred tax assets and will reassess the need to recognise them at subsequent
balance sheet dates.

5. Interest and similar income

3 July to
31 December
2010 2009
£m £m

On secured advances 365.7 –

On other lending 0.9 –
On investment securities and deposits 40.2 –

406.8 –

Interest accrued on individually impaired assets was less than £0.1m (2009 £nil).

6. Interest and similar expense

3 July to
31 December
2010 2009
£m £m

On retail customer accounts 414.0 –

Retail and wholesale guarantee costs 33.2 –
Other 0.6 –

447.8 –

37
 NOTES TO THE ACCOUNTS (continued)

7. Fee and commission income

3 July to
31 December
2010 2009
£m £m

Service level agreements with Northern Rock (Asset Management) plc and Bradford & Bingley plc 168.3 –
Other fee and commission income 6.3 –

174.6 –

8. Administrative expenses

3 July to
31 December
2010 2009
£m £m
Administrative expenses
Wages and salaries 121.7 –
Social security costs 12.2 –
Other pension costs 10.9 –

Total staff costs 144.8 –

Other administrative expenses 105.9 –

250.7 –
Other administrative expenses include:
Hire of equipment 3.5 –
Property rentals 11.7 –
Remuneration of auditors (see below) 0.6 –

In 2010 administrative expenses of £102.9m were recharged to Northern Rock (Asset Management) plc via the service level agreement.

Exceptional restructuring costs

3 July to
31 December
2010 2009
£m £m

Redundancy and other staff costs 25.4 –

Professional fees recharged by the Tripartite Authorities 1.8 –
Strategic project development 32.7 –

59.9 –

In 2010 exceptional restructuring costs of £49.6m were recharged to Northern Rock (Asset Management) plc and Bradford & Bingley plc via the service level
agreement.
The monthly average number of persons (including Directors) employed by the Group and Company was as follows:
3 July to
31 December
2010 2009

Full time 3,371 –

Part time 939 –

In 2010 aggregate Directors’ emoluments including taxable benefits were £2,788k. The remuneration of the highest paid Director was £1,081k plus personal
pension arrangements of £237k.

38
NOTES TO THE ACCOUNTS (continued)

8. Administrative expenses (continued)

Services provided by the Group’s auditor and network firms

During the year the Group obtained the following services from the Group’s auditor, as detailed below:
3 July to
31 December
2010 2009
£m £m

Administrative expenses
Fees payable to Company auditor for the audit of parent Company and consolidated financial statements 0.4 –
Fees payable to Company auditor and its associates for other services
– Other services pursuant to legislation (including review of half year Interim Statement) 0.1 –
– Other services (see note i) 0.1 –

0.6 –

i) Other services comprise assurance work in respect of the legal and capital restructure and taxation services.

9. Retirement benefit obligations

The Company operates one main employee benefit scheme which came into existence on 1 January 2010 when all employees of Northern Rock (Asset
Management) plc were transferred to Northern Rock plc and became members of the Northern Rock (2010) Pension Scheme (“the Scheme”). A past service cost
of £9.0m was recognised on transfer. The Scheme has both defined benefit and defined contribution sections.
On 8 June 2010, it was announced that the defined benefit section of the Scheme would be closed to future accrual from January 2011. This resulted in a
curtailment gain of £9.8m.
The defined benefit section of the Scheme provided benefits based on final salary for certain employees. The assets of the Scheme are held in a separate trustee-
administered fund. Contributions to the defined benefit section were assessed in accordance with the advice of an independent qualified actuary using the
projected unit method.
The Company’s policy for recognising actuarial gains and losses is to recognise them immediately on the balance sheet through the statement of
comprehensive income.
The overall costs of the Scheme have been recognised in the Company’s accounts in accordance with IAS19. As the Scheme came into existence on 1 January
2010 there are no comparative figures given.

Summary of assumptions
2010
%

Price inflation 3.75

Rate of increase in salaries N/A
Rate of increase for pre 6 April 2006 pensions in payment (in excess of any Guaranteed Minimum Pension (GMP) element) 3.80
Rate of increase for post 6 April 2006 pensions in payment 3.55
Rate of increase for deferred pensions 3.75
Discount rate 5.35
Expected rate of return on assets 4.10

The most significant non financial assumption is the assumed rate of longevity. The table below shows the life expectancy assumptions used in the accounting
assessments based on the life expectancy of a member aged 60.
2010
Pensioner Non‑pensioner

Male 27.9 years 29.6 years

Female 30.5 years 32.1 years

The expected return on assets has been derived as the weighted average of the expected returns from each of the main asset classes. The expected return
for each asset class reflects a combination of historical performance analysis, the forward looking views of the financial markets (as suggested by the yields
available), and the views of investment organisations.

Categories of assets held

2010
%

Debt securities 94
Other 6

Total 100

39
 NOTES TO THE ACCOUNTS (continued)

9. Retirement benefit obligations (continued)

Funded status
2010
£m

Present value of defined benefit obligation (12.3)

Assets at fair value 15.4

Defined benefit asset 3.1

Disclosed pension expense for year:

a) Components of defined benefit pension expense
2010
£m

Current service cost 6.2

Interest cost 1.1
Expected return on assets (0.4)
Past service cost 9.0
Curtailment gain (9.8)

Total pension expense 6.1

The pension expense is recorded within administrative expenses in the income statement.

b) Statement of comprehensive income

2010
£m

Actuarial loss recognised in statement of comprehensive income 0.6

Cumulative actuarial (gain)/loss recognised at 1 January 2010 –

Cumulative actuarial loss recognised at 31 December 2010 0.6

Movements in present value of defined benefit obligation during the year

2010
£m

Present value of defined benefit obligation at 1 January 2010 –

Employer service cost 6.2
Interest cost 1.1
Plan participants’ contributions 1.2
Actuarial loss 0.8
Past service cost 9.0
Curtailment gain (9.8)
Other adjustments (transfer of money purchase guarantee reserve) 3.8

Present value of defined benefit obligation at 31 December 2010 12.3

Movements in fair value of defined benefit assets during the year

2010
£m

Fair value of assets at 1 January 2010 –

Expected return on assets 0.4
Actuarial gain 0.2
Employer contributions (including transfer of assets from the Northern Rock pension scheme) 9.8
Plan participants’ contributions 1.2
Other adjustments (transfer of money purchase guarantee reserve) 3.8

Fair value of assets at 31 December 2010 15.4

The actual return on plan assets in 2010 was £0.6m.

40
NOTES TO THE ACCOUNTS (continued)

9. Retirement benefit obligations (continued)

Experience gains and losses

2010
£m

Defined benefit obligation 12.3

Fair value of assets 15.4
Surplus 3.1
Actuarial loss on defined benefit obligation (0.8)
Experience gain on assets 0.2

Estimated total contributions for the year ending 31 December 2011 are £nil.
Pension costs for the defined contribution section of the Scheme were £3.9m and are recorded within administrative expenses in the income statement.

10. Impairment losses on loans and advances

On On
advances advances
secured on secured on On
residential residential buy unsecured
property to let property loans Total
£m £m £m £m
2010
Group and Company
At 1 January 2010 – – – –

Transferred from Northern Rock (Asset Management) plc 0.4 – 0.2 0.6
Increase in allowance during the year net of recoveries 1.7 0.1 0.1 1.9
Amounts written off during the year – – (0.1) (0.1)

At 31 December 2010 2.1 0.1 0.2 2.4

There were no impairment losses on loans and advances in 2009 and the impairment allowance at 31 December 2009 was £nil.

11. Net trading expense

3 July to
2010 31 December
£m 2009

Fair value movements of future cash flows, excluding accruals, on derivatives not in hedge accounting relationships (4.6) –
Translation gains on underlying instruments 0.2 –

(4.4) –

12. Taxation
The tax on the Group’s loss before tax differs from the theoretical amount that would arise using the standard weighted average rate of UK corporation tax of
28% (2009 28%) as follows:
3 July to
2010 31 December
£m 2009

Loss before taxation (223.5) –

Tax calculated at rate of 28% (2009 28%) 62.6 –

Deferred income tax asset arising not recognised (64.6) –
Expenses not deductible for tax purposes (4.3) –
Adjustment in respect of assets transferred from Northern Rock (Asset Management) plc 6.3 –

Taxation – –

A number of changes to the UK corporation tax system were announced in the June 2010 budget statement. The Finance (No 2) Act 2010, which was
substantively enacted on 20 July 2010, includes legislation reducing the main rate of corporation tax from 28% to 27% from 1 April 2011. Further reductions to
the main rate are proposed to reduce the rate by 1% per annum to 24% by 1 April 2014. The changes had not been substantively enacted at the balance sheet
date and therefore are not included in these financial statements.

13. Loss attributable to equity shareholders

Of the loss attributable to equity shareholders, £211.6m (3 July to 31 December 2009 profit of less than £0.1m) has been dealt with in the accounts of the
Company. As permitted by section 408 of the Companies Act 2006, the Company’s income statement has not been presented separately.
41
 NOTES TO THE ACCOUNTS (continued)

14. Analysis of financial assets and financial liabilities by measurement basis

2010
Group Derivatives in IAS 39 hedges
Investment
Financial securities Derivatives
liabilities at Available held as not in
amortised Loans and for sale loans and IAS 39 Fair value Cash flow
cost receivables securities receivables hedges hedge hedge Total
£m £m £m £m £m £m £m £m

Financial assets
Cash and balances with central banks – 4,646.0 – – – – – 4,646.0
Derivative financial instruments – – – – 4.7 141.1 3.2 149.0
Loans and advances to banks – 585.2 – – – – – 585.2
Loans and advances to customers – 12,374.4 – – – – – 12,374.4
Investment securities – – 363.2 297.8 – – – 661.0
Accrued income – 1.9 – – – – – 1.9

– 17,607.5 363.2 297.8 4.7 141.1 3.2 18,417.5

Non financial assets 144.3

18,561.8

Financial liabilities
Deposits by banks 0.7 – – – – – – 0.7
Customer accounts 16,903.2 – – – – – – 16,903.2
Derivative financial instruments – – – – 14.2 240.8 – 255.0
Accruals 120.4 – – – – – – 120.4

17,024.3 – – – 14.2 240.8 – 17,279.3

Non financial liabilities 95.0

Total liabilities 17,374.3

Equity 1,187.5

18,561.8

2009
Group Derivatives in IAS 39 hedges
Investment
Financial securities Derivatives
liabilities at Available held as not in
amortised Loans and for sale loans and IAS 39 Fair value Cash flow
cost receivables securities receivables hedges hedge hedge Total
£m £m £m £m £m £m £m £m

Financial assets
Cash and balances with central banks – 1,400.0 – – – – – 1,400.0
Derivative financial instruments – – – – – – – –
Loans and advances to banks – – – – – – – –
Loans and advances to customers – – – – – – – –
Investment securities – – – – – – – –
Accrued income – 0.1 – – – – – 0.1

– 1,400.1 – – – – – 1,400.1
Non financial assets –

1,400.1

Financial liabilities
Loans from HM Treasury 1,400.0 – – – – – – 1,400.0
Deposits by banks – – – – – – – –
Customer accounts – – – – – – – –
Derivative financial instruments – – – – – – – –
Accruals – – – – – – – –

1,400.0 – – – – – – 1,400.0
Non financial liabilities –

Total liabilities 1,400.0

Equity 0.1

1,400.1

42
NOTES TO THE ACCOUNTS (continued)

15. Cash and balances with central banks

Group and Company

2010 2009
£m £m

Cash in hand 8.1 –

Other balances with central banks 4,607.8 1,400.0

Included in cash and cash equivalents 4,615.9 1,400.0

Mandatory reserve deposits with central banks 30.1 –

4,646.0 1,400.0

Mandatory reserve deposits with central banks are not available for use in day to day operations.

16. Derivative financial instruments

Strategy in using derivative financial instruments

The Board has authorised the use of derivative instruments for the purpose of supporting the strategic and operational business activities of the Group and
reducing the risk of loss arising from changes in interest rates and exchange rates. All use of derivative instruments within the Group is to hedge risk exposure,
and the Group takes no trading positions in derivatives.
The objective, when using any derivative instrument, is to ensure that the risk to reward profile of any transaction is optimised. The intention is to only use
derivatives to create economically effective hedges. However, because of the specific requirements of IAS 39 to obtain hedge accounting, not all economic
hedges are designated as accounting hedges, either because natural accounting offsets are expected or because obtaining hedge accounting would be
especially onerous.
a) Fair value hedges
The Group designates a number of derivatives as fair value hedges. In particular the Group has three approaches establishing relationships for:
i) Hedging the interest rate and foreign currency exchange rate risk of non-prepayable, foreign currency denominated fixed rate assets or liabilities on a
one-for-one basis with fixed/floating or floating/fixed cross currency interest rate swaps.
ii) Hedging of interest rate risk of a single currency portfolio of sterling or Euro non-prepayable fixed rate assets/liabilities on a one-for-one basis with
vanilla fixed/floating or floating/fixed interest rate swaps.
iii) Hedging the interest rate risk of a portfolio of prepayable fixed rate assets with interest rate derivatives. This solution is used to establish a macro fair
value hedge for derivatives hedging fixed rate mortgages. The Group believes this solution is the most appropriate as it is consistent with its policy for
hedging fixed rate mortgages on an economic basis.
The total fair value of derivatives included within fair value hedges at 31 December 2010 was a net liability of £99.7m (2009 £nil).
b) Cash flow hedges
The Group designates a number of derivatives as cash flow hedges. In particular, the Group adopts an approach of using fixed interest rate swaps in a cash
flow hedge strategy to economically hedge the interest rate risk associated with the mortgage pipeline. The accounting hedge relationship is to hedge
floating rate sterling liabilities. The total fair value of derivatives included within cash flow hedges at 31 December 2010 was a net asset of £3.2m (2009 £nil).
c) Net investment hedges
The Group has not designated any derivatives as net investment hedges in 2010 or 2009.
All derivative financial instruments are held for economic hedging purposes, although not all derivatives are designated as hedging instruments under the terms
of IAS 39. The analysis below therefore splits derivatives between those in accounting hedge relationships and those in economic hedge relationships but not
in accounting hedge relationships.
2010 2009

Contract/ Fair values Contract/ Fair values

notional notional
amount Assets Liabilities amount Assets Liabilities
Group and Company £m £m £m £m £m £m

Derivatives in accounting hedge relationships

Derivatives designated as fair value hedges
Interest rate swaps 15,826.5 141.1 (240.8) – – –

Derivatives designated as cashflow hedges

Interest rate swaps 163.5 3.2 – – – –

15,990.0 144.3 (240.8) – – –

Derivatives in economic hedging relationships but not in accounting hedge relationships

Interest rate derivatives
Interest rate swaps 4,852.5 4.7 (14.2) – – –

Total recognised derivative assets/(liabilities) 20,842.5 149.0 (255.0) – – –

43
 NOTES TO THE ACCOUNTS (continued)

16. Derivative financial instruments (continued)

Gains on fair value hedges:
2010 2009
£m £m

On hedging instruments 5.3 –

On the hedged items attributable to the hedged risk 8.0 –

Fair value hedge ineffectiveness 13.3 –

Fair value hedge ineffectiveness recorded within interest income in the income statement amounted to a credit of £27.5m (2009 £nil). Fair value hedge
ineffectiveness recorded within interest expense in the income statement amounted to a charge of £14.2m (2009 £nil).
Cash flow hedges
Periods when cash flows are expected to occur and affect the income statement:
2010 2009
£m £m

Within one year 1.4 –

1.4 –

Cash flow hedge ineffectiveness recorded within interest expense in the income statement amounted to a charge of less than £0.1m in 2010 (2009 £nil).

17. Loans and advances to banks

Group Company
2010 2009 2010 2009
£m £m £m £m

Fixed rate 101.4 – 101.4 –

Variable rate 483.8 – 478.3 –

585.2 – 579.7 –

18. Loans and advances to customers

Group and Company

2010 2009
£m £m

Advances secured on residential property 11,407.9 –

Residential buy to let loans 791.5 –

Total advances secured on residential property 12,199.4 –

Unsecured loans 0.5 –

Gross loans and advances to customers 12,199.9 –

Impairment allowance (2.4) –

Net loans and advances to customers 12,197.5 –

Fixed rate 6,893.2 –

Variable rate 5,304.3 –

12,197.5 –

Fair value adjustments of portfolio hedging amounting to £176.9m (2009 £nil) relate to fair value adjustments of loans and advances to customers in relation to
interest rate risk as a result of their inclusion in a fair value portfolio hedge relationship.

44
NOTES TO THE ACCOUNTS (continued)

19. Investment securities

Group and Company

2010 2009
£m £m

Available for sale securities 363.2 –

Investment securities held as loans and receivables 297.8 –

661.0 –

a) Available for sale securities Group and Company

2010 2009
£m £m

At fair value
Listed 363.2 –
Unlisted – –

363.2 –

Fixed rate 363.2 –

Variable rate – –

363.2 –

The movement in available for sale securities was as follows: 2010 2009
£m £m

At 1 January 2010 / 3 July 2009 – –

Transferred from Northern Rock (Asset Management) plc 55.4 –
Additions 1,028.6 –
Disposals (sales and redemptions) (710.5) –
Exchange differences (9.8) –
Net losses on changes in fair value (0.5) –

At 31 December 363.2 –

b) Investment securities held as loans and receivables Group and Company

2010 2009
£m £m

Carrying value 297.8 –

Fair value 299.4 –

Listed 297.8 –
Unlisted – –

297.8 –

Fixed rate – –
Variable rate 297.8 –

297.8 –

45
 NOTES TO THE ACCOUNTS (continued)

20. Shares in group undertakings

The principal subsidiary of Northern Rock plc at 31 December 2010 is listed below. It operates in its country of incorporation and is directly held and wholly
owned by the Company:
Nature of business Country of incorporation
Northern Rock (Guernsey) Limited Retail deposit taker Guernsey

The Board of Northern Rock plc decided to close its banking operation in Guernsey as of 2 September 2010 as it no longer met the long term commercial
objectives of the Company. Northern Rock (Guernsey) Limited was placed in voluntary liquidation on 30 September 2010. Northern Rock (Guernsey) Limited was
considered to be part of the overall business of Northern Rock plc and therefore does not require further disclosure as a discontinued operation.
The investment is in the ordinary shares of Northern Rock (Guernsey) Limited and the cost at 31 December 2010 is less than £0.1m. The Directors consider the
value of the investment to be supported by the underlying assets.
The following companies are special purpose entities (SPEs) established in connection with the Group’s securitisation programme. Although the Company has
no direct or indirect ownership interest in these companies, they are regarded as legal subsidiaries under UK companies legislation. This is because they are
principally engaged in providing a source of long term funding to the Group, which in substance has the rights to all benefits from the activities of the SPEs.
They are therefore effectively controlled by the Group.
Nature of business Country of incorporation Date of incorporation
Gosforth Funding plc Issue of securitised notes England & Wales 3 December 2009
Gosforth Funding 2010-1 plc Issue of securitised notes England & Wales 30 October 2009
Gosforth Mortgages Trustee Limited Trust England & Wales 12 October 2009
Gosforth Mortgages Trustee 2010-1 Limited Trust England & Wales 5 January 2010
Gosforth Holdings Limited Holding company England & Wales 12 October 2009
Gosforth Holdings 2010-1 Limited Holding company England & Wales 4 January 2010

21. Intangible assets

Group and Company Software

£m
2010
Cost
At 1 January 2010 –
Transfer from Northern Rock (Asset Management) plc 23.1
Additions 2.8
Disposals (4.5)

At 31 December 2010 21.4

Impairment and amortisation

At 1 January 2010 –
Transfer from Northern Rock (Asset Management) plc 0.1
Amortisation charged in year 11.6
Adjustment arising on disposals (1.4)

At 31 December 2010 10.3

Net book amount:

At 31 December 2010 11.1

At 31 December 2009, the cost, impairment and amortisation and net book amount of intangible assets was £nil in both Group and Company.

46
NOTES TO THE ACCOUNTS (continued)

22. Property, plant and equipment

Plant,
equipment,
fixtures,
Land and fittings and
Group and Company buildings vehicles Total
2010 £m £m £m

Cost
At 1 January 2010 – – –
Transfer from Northern Rock (Asset Management) plc 15.8 16.9 32.7
Additions 1.2 10.9 12.1
Disposals – (1.5) (1.5)

At 31 December 2010 17.0 26.3 43.3

Depreciation
At 1 January 2010 – – –
Charged in year 0.7 8.2 8.9
Adjustment arising on disposals – (0.3) (0.3)

At 31 December 2010 0.7 7.9 8.6

Net book amount:

At 31 December 2010 16.3 18.4 34.7

At 31 December 2009, the cost, depreciation and net book amount of property, plant and equipment was £nil in both Group and Company.

23. Deferred income tax assets and liabilities

Based on their interpretation of the timing and level of reversal of existing taxable temporary differences, in line with relevant accounting standards,
management have concluded that it is not appropriate to recognise a deferred tax asset at the balance sheet date. Accordingly, deferred tax assets have not
been recognised in respect of the following items:
Group and Company

2010 2009
£m £m

Excess of depreciation over capital allowances (gross) 34.8 –

Unused tax losses (gross) 200.0 –
Pensions and other employee benefits (gross) (3.1) –
Change in accounting basis on adoption of IFRS (gross) 27.4 –

259.1 –

Under current tax legislation these unprovided deductible temporary differences and unused tax losses do not have an expiry date and can therefore be
recognised in the future as taxable profits arise.

24. Loans from HM Treasury

Group and Company

2010 2009
£m £m

Amount due to HM Treasury – 1,400.0

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 29).

25. Deposits by banks

Group and Company

2010 2009
£m £m

Fixed rate – –
Variable rate 0.7 –

0.7 –

47
 NOTES TO THE ACCOUNTS (continued)

26. Customer accounts

Group and Company

2010 2009
£m £m

Retail funds and deposits 16,691.3 –

Other customer accounts 211.9 –

16,903.2 –

Fixed rate 10,347.9 –

Variable rate 6,555.3 –

16,903.2 –

27. Accruals and deferred income

Group and Company

2010 2009
£m £m

Accrued interest 119.7 –

Other accruals 44.9 –

164.6 –

28. Provisions for liabilities and charges

Group and Company

2010 2009
£m £m

The movement in provisions was as follows:

At 1 January 2010 / 3 July 2009 – –
Charged in the year 25.4 –
Utilised in the year (18.0) –

At 31 December 7.4 –

The provision charged and utilised in the year is in respect of restructuring costs and is expected to be fully utilised within the next twelve months.
At 31 December 2009, provisions for liabilities and charges were £nil in both Group and Company.

29. Share capital

2010 2010 2009 2009

Number £m Number £m

Authorised share capital

Ordinary shares of £1 each 1,400,000,000 1,400.0 50,000 0.1

1,400,000,000 1,400.0 50,000 0.1

2010 2010 2009 2009

Number £m Number £m

Issued and fully paid share capital

Ordinary shares of £1 each 1,400,000,000 1,400.0 2 –
Issued and partly paid share capital
Ordinary shares of £1 each – – 49,998 0.1

1,400,000,000 1,400.0 50,000 0.1

48
NOTES TO THE ACCOUNTS (continued)

29. Share capital (continued)

2010 2009
Number £m

Balance at 1 January 2010 / 3 July 2009 50,000 –

Issuance of ordinary shares 1,399,950,000 50,000

Balance at 31 December 1,400,000,000 50,000

No dividends were paid in 2010 or 2009.

30. Other reserves

a) Revaluation reserve – available for sale investments 2010

£m

Balance at 1 January 2010 –

Transfer from Northern Rock (Asset Management) plc (16.2)
Net losses from changes in fair value (1.6)
Amortisation of fair value differences in respect of securities transferred to loans and receivables 10.9

Balance at 31 December 2010 (6.9)

b) Hedging reserve – cash flow hedges 2010

£m

Balance at 1 January 2010 –

Amounts recognised in equity 1.5
Amounts transferred to interest payable (0.1)

Balance at 31 December 2010 1.4

Total other reserves

At 31 December 2010 (5.5)

At 31 December 2009 the balance on other reserves was £nil.

31. Financial risk management

A) Financial Risk Management

Governance
The Board of Directors is responsible for determining strategies and policies for the Group. The Group maintains a risk governance structure that strengthens
risk evaluation and management, in addition to positioning the Group to manage the changing regulatory environment in an efficient and effective manner.
The Group works within the terms of the Shareholder Framework, and has the primary responsibilities of:
•• Developing and recommending a business plan aligned to the objectives of the Shareholder; and,
•• Delivering the plan.
The diagram below shows the governance structure in operation at Northern Rock plc.

49
 NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

Board Level Governance

BOARD

AUDIT RISK NOMINATION REMUNERATION

COMMITTEE COMMITTEE COMMITTEE COMMITTEE

Management Level Governance

EXECUTIVE
COMMITTEE

OPERATING CAPITAL RETAIL PRODUCTS ASSET AND RETAIL OPERATIONAL CUSTOMER

PLAN MANAGEMENT AND LIMITS LIABILITY CREDIT RISK RISK AND PERFORMANCE
COMMITTEE COMMITTEE COMMITTEE COMMITTEE COMMITTEE COMPLIANCE COMMITTEE
COMMITTEE

Details of the operation of Management Level Governance and its committees are set out below.
Executive Committee (ExCo) is the most senior management operating committee, chaired by the Executive Chairman. ExCo is responsible for developing
and delivering against a Board approved strategy, and for ensuring the effective and smooth running of the business within Board approved risk appetites.
It is responsible for putting in place effective monitoring and control mechanisms, which enable it to have appropriate oversight of business activities. ExCo has
seen several membership changes with a number of new and external appointments during the year. The team periodically reviews and refines its governance
and operating framework to ensure that there are effective relationships with the Board and strong management oversight and control of all operations. As part
of this framework, ExCo has seven sub committees which provide for greater focus in respect of risk management (Asset and Liability Committee, Retail Credit
Risk Committee and Operational Risk and Compliance Committee), capital management (Capital Management Committee), business change (Retail Products
and Limits and Operating Plan Committees) and customer experience (Customer Performance Committee).
Operating Plan Committee (OPC) is responsible for overseeing, reviewing and challenging the progress towards delivery of the Operating Plan. OPC monitors
Business Plan variances and recommends changes to the Operating Plan where necessary. It also manages the discretionary investment budget and oversees
progress of all major projects.
Capital Management Committee (CMC) is the executive level committee through which all aspects of capital management are monitored, reported and
controlled. It is responsible for overseeing the adequacy of capital resources to meet internal, rating agency and regulatory requirements. It is ultimately
responsible for recommending to the Board for its approval, policies and strategies to ensure that capital management is optimised to meet internal and external
stakeholder requirements.
Retail Products and Limits Committee (RPLC) is responsible for establishing and maintaining an effective framework within which new products are reviewed
and approved. This includes conformance with the New Product Approval policy and the Delegated Authorities Framework for product development. It is also
responsible for establishing limits and boundaries within which new products are sold and monitoring actual performance against these limits.
Asset and Liability Committee (ALCO) is responsible for overseeing the asset, liquidity, liability and other solvency risks, specifically market risk, wholesale
credit risk and liquidity risk (referred to as ‘financial risk’). ALCO is ultimately responsible for recommending to the Risk Committee for its approval, policies and
frameworks that ensure optimal risk processes and outcomes for the Group and that liquidity positions are optimised to meet internal and external stakeholder
requirements. ALCO manages the Group’s liquidity resources to meet internal and regulatory liquidity requirements, and it monitors the Group’s secured
funding activities and vehicles.
Retail Credit Risk Committee (RCRC) is the principal body through which all aspects of Retail Credit Risk are monitored, reported and controlled. It is the most
senior retail credit decision making authority below the Board. It primarily acts as the formal designated Committee to manage all retail credit related aspects of
Basel II – Capital Requirement Directive. RCRC develops and recommends a Retail Credit Risk Appetite for approval by ExCo and the Board (via Risk Committee).
It also reviews and approves Credit Risk Strategy and Policy. In addition, RCRC ensures that the Company has policies and processes which support Responsible
Lending and the fair treatment of customers at all times.
RCRC reviews detailed portfolio monitoring reports to ensure that the performance and quality of credit risk portfolios remains within agreed risk appetite,
submitting appropriate summary information to the Risk Committee. RCRC reviews and recommends any necessary changes to credit risk models and
established a credit sanctioning and approval framework, within which formal lending authorities are delegated and controlled throughout the organisation.
It establishes lower level working groups to ensure suitably skilled cross functional experts have the opportunity to review specific matters in detail before
submission to RCRC.
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. ORCC develops and recommends the Operational Risk Policies and Risk Appetite for approval by ExCo and the Board.
ORCC regularly reviews all operational losses in line with risk appetite and budgets. It also reviews other significant risk events and failures in order to enhance
operational risk management. ORCC develops and recommends legal and regulatory risk policies, considers new/revised regulatory requirements and reviews
regulated product complaint trends.
Customer Performance Committee (CPC) is responsible for the Customer Experience Framework and Treating Customers Fairly (TCF). It directs the
identification and implementation of customer improvements, and the ongoing sustainability and improvement in delivering fair customer outcomes.

50
NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

Risk Management
Definitions
The principal risks that the Group manages are as follows:
•• Credit risk: 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 Group
•• 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 Group
•• Liquidity risk: the risk that the Group is unable to meet its obligations as they fall due
•• Operational risk: the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events including legal risk
•• Legal risk: the risk of legal sanction, material financial loss or loss to reputation the Group may suffer as a result of its failure to comply with the law,
inadequately document its contractual arrangements or inadequately assess and implement changes required by forthcoming legislation or emerging
case law
•• Regulatory risk is defined in this document as the risk of the Group failing to comply with the legal and regulatory requirements applying to its 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
•• Northern Rock plc being used for the purposes of financial crime.

Strategic Risk Management

The Group maintains a Strategic Risk Radar to assess and monitor its material macroeconomic and event specific risks. This report is subject to regular review
by ExCo, Risk Committee and the Board. It is used to support strategic planning, refine operational priorities and ensure that mitigants and contingency plans
are in place.
At the end of 2010 and beginning of 2011, the principal strategic risks and uncertainties faced by the Group can be broadly summarised as follows:
i) Prolonged low Bank Base Rate – the Group’s Business Plan has been formulated to address this directly.
ii) Timing of return to sustainable profitability – the Group’s Business Plan has been formulated to address this directly.
iii) Double dip recession – the Group has run stress tests to model its business for this adverse macroeconomic environment and to ensure it has appropriate
mitigants and contingency plans in the event of the downturn materially impacting the housing market for a second time. The Business Plan is based on a
prudent view of market expectations for house prices, unemployment and Bank Base Rate.
iv) Exit from Temporary Public Ownership (TPO) – the Business Plan is developed to maximise the value of the Group but makes no assumptions around the
timing of TPO exit.

Developments in Risk Management

During 2010, the Group has continued to make significant progress in its Risk Management capabilities. The CRO has an independent reporting line directly
to the Executive Chairman and reports on a dotted line basis to the Chair of the Risk Committee. As the independent second line of defence, the Risk function
takes an integrated, holistic view of risks and ensures that a joined-up and consistent approach to the aggregation and management of risks is in place, and is
integrated into business management and decision making.
Key developments in 2010 include:
•• Enhancing the Governance Framework and Policies
•• Recruitment of additional Risk specialists and development of existing colleagues
•• Continued development of Internal Ratings Basis (IRB) models for Credit Risk
•• Enhancing Operational Risk processes and reporting
•• Improved Liquidity Risk monitoring processes, systems and controls
•• Strengthening Regulatory Risk monitoring processes, controls, resources and overall capability.
Each of the major risk categories is listed below together with a brief description of the risk management framework.

i) Credit risk
Risk appetite
Credit risk appetite is an expression of boundaries (qualitative and quantitative) that provide clear guidance on the level of risk exposure that the Board considers
acceptable and in line with the corporate strategy. A revised credit risk appetite aligned to the current business strategy and external environment was approved
by the Board in November 2010. Risk appetite is subject to an annual review process and limits are regularly monitored and reported to the Risk Committee.
The Board’s high level expression of a desired credit risk appetite is also translated into specific maximum risk limits in relation to product and lending policy
parameters within which management must operate. In addition there are whole book parameters reflecting the inherent risks of previous lending, with trigger
levels above which specific control actions may be initiated. Monitoring and reporting against the risk appetite and the associated limits and triggers were in
place for both new lending and whole book during 2010.
Lending policy criteria
New lending is tightly controlled using an appropriate mix of statistical and experiential analysis. New business quality is constantly monitored and controlled
by the Credit Decisioning team using sophisticated scoring techniques and a number of other core control components as follows:
•• Credit scoring. Automated statistically-based credit scoring methods are used in the decision making process for new and existing customers. These are
subject to regular monitoring, review and approval
•• Affordability, underwriting and mandates. To lend responsibly, the Group employs affordability models based upon customers’ income and outgoings,
and experienced underwriters to determine customers’ overall financial situation and ability to repay credit. The ability to agree a credit agreement with a
customer is prescribed in Board delegated authority levels to specific individuals who have been proven to have the requisite credit skills

51
 NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

•• Valuations. Property assets are independently valued at mortgage inception. Where a revaluation is required, this is led by specialist Property Risk personnel
using a range of valuation methods
•• Monitoring and performance. The credit portfolios are monitored regularly, with a range of prescribed reports distributed to key stakeholders. Detailed
management information is provided to the Retail Credit Risk Committee, Executive Committee and Risk Committee
•• Collections and recoveries. The Group’s debt management process is led by the Chief Operating Officer. A team of specialists manage all aspects of
collections and recoveries with the aim of helping customers who encounter financial difficulties to achieve a positive outcome for the customer and
the Group
•• Stress testing and scenario analysis, to simulate a range of outcomes and calculate the risk impact of adverse macroeconomic conditions.
Credit Risk Measurement
The credit risk of lending to customers is a factor of three components:
•• The probability of default (PD) by the customer on contractual obligations
•• The exposure at default (EAD) by the customer on contractual obligations
•• The likely recovery of defaulted obligations (loss given default (LGD)).
Internal rating based models are used to assess customer probability of default, exposure at default and loss given default. The rating models use statistical
analysis combined with external data and are subject to rigorous internal monitoring and change control.
These credit risk models are used throughout the Group to support the analytical elements of the credit risk management framework, in particular the
quantitative risk assessment part of the credit approval process, ongoing credit monitoring as well as portfolio level analysis and reporting.
Credit risk models used by the Group can be grouped broadly into two categories:
•• PD/customer credit grade – these models assess the probability that a customer will fail to make full and timely repayment of credit obligations over a
time horizon. There are a number of different credit rating models in use across the Group, each of which considers particular customer characteristics.
The credit rating models use a combination of quantitative inputs, such as transaction characteristics, recent financial performance, credit bureau data and
customer behaviour.
•• LGD – these models estimate the expected loss that may be suffered by the Group on a credit facility in the event of default. The Group’s LGD models take
into account the type of borrower and any security held.
Corporate and Wholesale Credit Risk
Corporate Credit Counterparty risk arises through Treasury hedging and investment activities and related balance sheet management requirements.
Credit risk can be broken down into two elements:
•• Counterparty risk (the risk of default or rating migration of derivative counterparties)
•• Wholesale credit risk (the risk of default or rating migration of issuers in the Treasury investment portfolio).
The Board has approved a framework for maximum credit counterparty limits against which total exposures are continually monitored and controlled.
The  credit  limit structure adopts a risk based matrix whereby lower rated counterparties are afforded lower overall levels of limit. Single counterparties are
assigned maximum limits in accordance with the ratings matrix, based on the lowest rating afforded to any part of the counterparty group.
Maximum credit risk exposure at 31 December before collateral and other credit enhancements:
2010 2009
£m £m
On balance sheet
Cash and balances with central banks 4,646.0 1,400.0
Derivative financial instruments 149.0 –
Loans and advances to banks 585.2 –
Loans and advances to customers 12,199.9 –
Investment securities 661.0 –

18,241.1 1,400.00
Off balance sheet
Loan commitments 1,168.3 –

Loans and advances by credit quality:

Loans and Residential Unsecured

advances mortgage personal
to banks loans loans
2010 £m £m £m

Neither past due nor impaired 585.2 12,097.1 0.5

Past due but not impaired – 102.0 –
Impaired – 0.3 –

585.2 12,199.4 0.5

52
NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

Loans and Residential Unsecured

advances mortgage personal
to banks loans loans
2009 £m £m £m

Neither past due nor impaired – – –

Past due but not impaired – – –
Impaired – – –

– – –

The credit quality of loans neither past due nor impaired may be assessed by reference to the internal ratings and probability of default bandings allocated to
loans by the Company’s internal credit assessment models as set out in the tables below:
2010 2009

Loans and Loans and

advances to advances to
banks banks
£m £m

AA 8.3 –
AA– 145.1 –
A+ 365.3 –
A 61.4 –
BB 5.1 –

585.2 –

2010 2009

Residential Unsecured Residential Unsecured

mortgage personal mortgage personal
loans loans loans loans
£m £m £m £m
PD band
Risk 1 – very low risk 11,805.1 0.5 – –
Risk 2 – low risk 104.2 – – –
Risk 3 – medium risk 137.9 – – –
Risk 4 – high risk 49.9 – – –

12,097.1 0.5 – –

Available for sale securities and investment securities held as loans and receivables by credit quality:
2010 2009
Investment Investment
Available securities held Available securities held
for sale as loans and for sale as loans and
securities receivables securities receivables
£m £m £m £m

Neither past due nor impaired 363.2 297.8 – –

Past due but not impaired – – – –
Impaired – – – –

363.2 297.8 – –

53
 NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

The credit quality of available for sale securities and investment securities held as loans and receivables by reference to credit ratings is set out in the
table below:
2010 2009
Investment Investment
Available securities held Available securities held
for sale as loans and for sale as loans and
securities receivables securities receivables
£m £m £m £m

AAA 363.2 234.0 – –

AA – 31.0 – –
AA– – 19.8 – –
A+ – 13.0 – –

Total 363.2 297.8 – –

Past due not impaired loans:

2010 Loans and
advances to Residential Unsecured
banks mortgage loans personal loans
£m £m £m

Up to one month – – –
In one to three months – 73.2 –
In three to six months – 21.5 –
Over six months – 7.3 –

– 102.0 –

2009 Loans and

advances to Residential Unsecured
banks mortgage loans personal loans
£m £m £m

Up to one month – – –
In one to three months – – –
In three to six months – – –
Over six months – – –

– – –

Renegotiated loans that would otherwise be past due or impaired at 31 December 2010 amounted to £1.7m (2009 £nil).
Collateral
Due to the nature of the Group’s exposures (comprising primarily residential mortgages), the only collateral held against credit risk was that in respect of the
counterparty risk arising on derivative transactions (in the form of cash) and in respect of residential lending (in the form of mortgage charges over residential
property). Valuations on residential property are carried out on a quarterly basis. Cash collateral held against counterparty credit risk at 31 December 2010
amounted to £0.7m (2009 £nil), residential property held amounted to £25,722.0m (2009 £nil). The table below shows an estimate of the fair value of collateral
held against financial assets.
2010 Loans and Derivative
advances to Residential financial
banks mortgage loans instruments
£m £m £m

Neither past due nor impaired

Property – 25,556.7 –
Cash – – 0.7
Other – – –

Past due but not impaired

Property – 164.5 –
Cash – – –
Other – – –

Impaired
Property – 0.8 –
Cash – – –
Other – – –

Total – 25,722.0 0.7

54
NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

2009 Loans and Derivative

advances to Residential financial
banks mortgage loans instruments
£m £m £m

Neither past due nor impaired

Property – – –
Cash – – –
Other – – –

Past due but not impaired

Property – – –
Cash – – –
Other – – –

Impaired
Property – – –
Cash – – –
Other – – –

Total – – –

Impairment
All credit portfolios are regularly reviewed to assess for impairment. A loan or portfolio of loans is considered to be impaired if there is any observable data
indicating that there has been a measurable decrease in the estimated future cash flow or their timings. This will include identification of:
•• Significant financial difficulty of the customer,
•• Default or delinquency in interest or principal payments,
•• The borrower entering bankruptcy or other financial reorganisation, and
•• Adverse changes in the payment status of borrowers.
In the retail mortgage portfolio, individual impairments may occur where the Group has taken possession of the property or where specific circumstances
indicate that a loss is likely to be incurred. In addition, collective impairment allowances across the retail credit portfolios are calculated on a portfolio basis using
formulae which take into account the probability of default, the roll to possession and write-off and the loss given default, less the value of any security held.
These parameters are kept under regular review to ensure that, as far as possible, they reflect current economic circumstances and risk profile.

Concentration risk
Concentration risk is managed at portfolio, product, and counterparty levels. This is carried out through the application of limits relating to geographical spread,
the size of loan relative to property value (at counterparty and portfolio levels) and the concentration of borrowers in each risk band.
The following table breaks down the Group’s main credit exposures by geographical region at their carrying amounts. Exposures are allocated to regions based
on the country of domicile of the counterparty:
2010 UK Europe US Other countries Total
£m £m £m £m £m

Derivative financial instruments 116.5 8.6 17.1 6.8 149.0

Loans and advances to banks 507.2 74.8 – 3.2 585.2
Loans and advances to customer
Residential mortgage lending 12,197.2 – – – 12,197.2
Unsecured lending 0.3 – – – 0.3
Available for sale securities – 363.2 – – 363.2
Investment securities held as loans and receivables 230.1 47.8 – 19.9 297.8

As at 31 December 2010 13,051.3 494.4 17.1 29.9 13,592.7

2009 UK Europe US Other countries Total

£m £m £m £m £m

Derivative financial instruments – – – – –

Loans and advances to banks – – – – –
Loans and advances to customer
Residential mortgage lending – – – – –
Unsecured lending – – – – –
Available for sale securities – – – – –
Investment securities held as loans and receivables – – – – –

As at 31 December 2009 – – – – –

55
 NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

LTV (%) – Indexed value as of financial year end Residential mortgage loans
2010 2009
£m £m

<70% 7,981.4 –
70%-75% 1,544.7 –
75%-80% 1,254.1 –
80%-85% 780.0 –
85%-90% 424.8 –
90%-95% 149.3 –
95%-100% 51.7 –
>100% 13.4 –

12,199.4 –

Loan size by outstanding balance

Outstanding balance Residential mortgage loans
2010 2009
£m £m

£0-£100k 3,681.2 –
£100k-£250k 5,520.6 –
£250k-£500k 1,953.9 –
£500k-£1m 816.3 –
£1m-£2.5m 213.1 –
>£2.5m 14.3 –

12,199.4 –

ii) Market Risk

Market risk is 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. Northern Rock plc does not trade or make
markets in any areas and market risk arises only as a consequence of carrying out and supporting core business activities.
Market risk within the Group can be subdivided into the following risks:
•• Mismatch. The effect that variations in the relationship between different points on the yield curve have on the value of fixed rate assets and liabilities
•• Prepayment. The effect that variations in early repayment have on expected run off profiles of fixed rate loans and therefore on the effectiveness of hedging
transactions
•• Basis. Created where balance sheet assets and liabilities are sensitive to different underlying base reference measures e.g. indices or rates. Basis risk arises
for example where mortgage interest rates are linked to Bank Base but the liabilities funding them are linked to LIBOR
•• Reset. Exposure to the timing of repricing of assets and liabilities or to a sudden spike in a key underlying base reference measure
•• Foreign Exchange (FX). Volatility in earnings resulting from movements in exchange rates altering the sterling value of unmatched foreign currency income
streams, assets and liabilities (principally Euro positions).
The Bank offers predominantly banking, mortgage and savings products with varying interest rate features and maturities which create potential interest rate
risk exposures. Primary risks arise as a result of timing differences on the repricing of assets and liabilities, unexpected changes in yield curves and changes in
the correlation of interest rates between different financial instruments. In addition, structural interest rate risk arises in the Group’s consolidated balance sheet
as a result of fixed, variable rate and non interest bearing assets and liabilities.
Risk exposures are controlled using position limits which require the Group’s Treasury function to manage exposure to movements in the market.
Interest Rate Risk
Interest rate sensitivity arises from the relationship between interest rates and net interest income resulting from the periodic repricing of assets and liabilities.
The Group offers fixed rate residential mortgages and savings products on which the interest rate paid by or to the customer is fixed for an agreed period of
time at the start of the contract. The Group closely monitors mortgage redemption and repayment patterns and reduces the mismatch of the expected maturity
profiles of its interest earning assets and interest bearing liabilities through the use of hedging strategies.
The Group uses a number of measures to monitor and control interest rate risk and sensitivity. One such measure evaluates the difference in principal value
between assets and liabilities repricing in various gap periods. Risk weights are assigned to each gap period which reflect potential losses for a given change in
rates and based on these an economic value impact of a positive 200 basis point interest rate shock is calculated for each period on the retail banking book. The
economic impact of this shock on the income statement was a reduction of net interest income of £11.2m as at 31 December 2010.
The following table gives an analysis of the repricing periods of assets and liabilities on the Bank balance sheet at 31 December.

56
NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

Items are allocated to time bands in the table below by reference to the earlier of the next contractual interest rate repricing date and the residual maturity date.
Amounts shown in respect of loans and advances to customers include fair value adjustments of portfolio hedging.
2010 After After After Non
3 months 6 months 1 year interest
Within but within but within but within After bearing
3 months 6 months 1 year 5 years 5 years funds Total
£m £m £m £m £m £m £m
Assets
Cash and balances with central banks 4,619.7 – – – – 26.3 4,646.0
Loans and advances to banks 576.7 – – – – 8.5 585.2
Loans and advances to customers 5,544.0 572.6 1,218.2 4,302.9 528.0 208.7 12,374.4
Investment securities 372.7 216.4 51.4 25.0 – (4.5) 661.0
Other assets – – – – – 295.2 295.2

Total assets 11,113.1 789.0 1,269.6 4,327.9 528.0 534.2 18,561.8

Liabilities
Deposits by banks 0.7 – – – – – 0.7
Customer accounts 7,348.8 1,305.0 4,002.6 4,161.6 9.7 75.5 16,903.2
Other liabilities – – – – – 470.4 470.4
Shareholders’ equity – – – – – 1,187.5 1,187.5

Total liabilities 7,349.5 1,305.0 4,002.6 4,161.6 9.7 1,733.4 18,561.8

Notional values of derivatives affecting
interest rate sensitivity 2,334.1 (409.5) (2,810.5) 348.4 537.5 – –

9,683.6 895.5 1,192.1 4,510.0 547.2 1,733.4 18,561.8

Total interest rate sensitivity gap 1,429.5 (106.5) 77.5 (182.1) (19.2) (1,199.2) –

Cumulative interest rate sensitivity gap 1,429.5 1,323.0 1,400.5 1,218.4 1,199.2 – –

2009 After After After Non

3 months 6 months 1 year interest
Within but within but within but within After bearing
3 months 6 months 1 year 5 years 5 years funds Total
£m £m £m £m £m £m £m
Assets
Cash and balances with central banks 1,400.0 – – – – – 1,400.0
Loans and advances to banks – – – – – – –
Loans and advances to customers – – – – – – –
Investment securities – – – – – – –
Other assets – – – – – 0.1 0.1

Total assets 1,400.0 – – – – 0.1 1,400.1

Liabilities
Loans from HM Treasury 1,400.0 – – – – – 1,400.0
Deposits by banks – – – – – – –
Customer accounts – – – – – – –
Other liabilities – – – – – – –
Shareholders’ equity – – – – – 0.1 0.1

Total liabilities 1,400.0 – – – – 0.1 1,400.1

Notional values of derivatives affecting
interest rate sensitivity – – – – – – –

1,400.0 – – – – 0.1 1,400.1

Total interest rate sensitivity gap – – – – – – –

Cumulative interest rate sensitivity gap – – – – – – –

In addition to the calculation of the sensitivity of the total balance sheet to a positive 200 basis point interest rate shock, a separate sensitivity calculation is
carried out for the fixed rate mortgage book. The calculation measures the sensitivity of each portfolio to a 200 basis point parallel shift in rates. The economic
impact of this shift on the income statement was a reduction of net interest income of £15.4m as at 31 December 2010 (2009 £nil).

57
 NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

Use of Derivatives
The Board has authorised the use of derivative instruments where their use is appropriate in reducing the risk of loss arising from changes in interest rates and
exchange rates. All use of derivative instruments within the Group is to hedge financial risk exposure, and the Group takes no trading positions in derivatives.
The Group uses a number of derivative instruments to reduce interest rate risk and currency risk. These have, from time to time, included interest rate swaps,
interest rate options, forward rate agreements, interest rate and bond futures, currency swaps and forward foreign exchange contracts. The Group will select
the instrument that optimises the following conditions:
•• Minimises capital utilisation
•• Minimises overall cost
•• Maximises impact on liquidity
•• Minimises administrative and accounting complexity.
The benefit of using derivative instruments is measured by examining the anticipated consequences of not hedging the perceived risk. The vast majority of the
Group’s derivatives activity is contracted with major banks and financial institutions.
Derivative instruments will be used by the Group for the following purposes:
•• To reduce the interest rate risk (and any FX risk) in the Group’s balance sheet
•• To protect the Group’s earnings from unexpected movements caused by market risks
•• To develop retail products without creating unacceptably high structural risk for the Group.

Off balance sheet items

Loan commitments
Contractual amounts to which the Group is committed for extension of credit to customers are summarised in the table below.
Operating lease commitments
Minimum future lease payments under non-cancellable operating leases are summarised in the table below.
Capital commitments
Capital commitments for the acquisition of buildings and equipment are summarised in the table below.
2010 Within In one to Over
one year five years five years Total
£m £m £m £m

Loan commitments 337.8 – 830.5 1,168.3

Operating lease commitments
  Land and buildings 0.2 8.2 2.7 11.1
  Other operating leases – 4.0 – 4.0
Capital commitments
  Software 4.1 – – 4.1

342.1 12.2 833.2 1,187.5

At 31 December 2009 commitments were £nil.

Currency risk
Currency risk arises as a result of the Group having assets, liabilities and derivative items that are denominated in currencies other than sterling as a result of
normal banking activities, including wholesale funding.
In addition to raising funds through sterling money markets, capital markets and the domestic retail savings market, the Group raises Euro denominated retail
funds through its branch in Ireland. The Group’s policy is to minimise exchange rate exposures by using cross currency swaps and forward foreign exchange
contracts, or to match exposures with assets denominated in the same currency.
At 31 December 2010, liabilities exceeded assets denominated in € by €1.2m, or £1.0m after taking into account foreign currency derivatives. The Group was
sensitive to exchange rate gains and losses of less than £0.1m for each 1cent movement in the £: € exchange rate at 31 December 2010.

58
NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

The table below gives values of assets and liabilities at sterling carrying values denominated in different currencies at the balance sheet date.
2010 US$ € Other Total
£m £m £m £m
Assets
Cash and balances with central banks – 0.8 – 0.8
Loans and advances to banks – 334.1 – 334.1
Investment securities – 309.6 – 309.6
Other assets – 0.1 – 0.1

Total assets – 644.6 – 644.6

Liabilities
Customer accounts – 644.2 – 644.2
Other liabilities – 1.4 – 1.4

Total liabilities – 645.6 – 645.6

Net position – (1.0) – (1.0)

At 31 December 2009 all balances were in sterling.

Fair values of financial assets and liabilities

The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Group’s balance sheet at their
fair value. Assets are presented at bid prices, whereas offer prices are used for liabilities. The accounting policy note sets out the key principles for estimating
the fair values of financial instruments. This note provides some additional information in respect of financial instruments carried at amortised cost. Similar
additional information in respect of instruments carried at fair value is included in the respective note for the instrument.
Carrying value Fair value

2010 2009 2010 2009

£m £m £m £m

Financial assets
Cash and balances with central banks 4,646.0 1,400.0 4,646.0 1,400.0
Loans and advances to banks 585.2 – 585.2 –
Loans and advances to customers 12,197.5 – 12,218.2 –
Investment securities held as loans and receivables 297.8 – 299.4 –

Financial liabilities
Loans from HM Treasury – 1,400.0 – 1,400.0
Deposits by banks 0.7 – 0.7 –
Customer accounts 16,903.2 – 17,202.2 –

Valuation methods for calculations of fair values in this table are set out below:
Cash and balances with central banks
Fair value approximates to carrying value because they have minimal credit losses and are either short term in nature or reprice frequently.
Loans and advances to banks
Fair value was estimated by using discounted cash flows applying either market rates where practicable or rates offered by other financial institutions for loans
with similar characteristics. The fair value of floating rate placements, fixed rate placements with less than six months to maturity and overnight deposits is their
carrying amount.
Loans and advances to customers
The Group provides loans of varying rates and maturities to customers. The fair value of loans with variable interest rates is considered to approximate to carrying
value. For loans with fixed interest rates, fair value was estimated by discounting cash flows using market rates or rates normally offered by the Group. The
change in interest rates since the majority of these loans were originated means that their fair value can vary significantly from their carrying value. However,
as the Group’s policy is to hedge fixed rate loans in respect of interest rate risk, this does not indicate that the Group has an exposure to this difference in value.
Investment securities held as loans and receivables
Fair values are based on quoted prices where available or by using discounted cash flows applying market rates.
Deposits by banks and customer accounts
Fair values of deposit liabilities repayable on demand or with variable interest rates are considered to approximate to carrying value. The fair value of fixed
interest deposits with less than six months to maturity is their carrying amount. The fair value of all other deposit liabilities was estimated using discounted cash
flows, applying either market rates or rates currently offered by the Group for deposits of similar remaining maturities.
The table below summarises the fair value measurement basis used for assets and liabilities held on the balance sheet at fair value. There are three levels to the
hierarchy as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, whether directly (i.e. as prices) or indirectly
(i.e. derived from prices)
Level 3 – Inputs for the asset or liability that are not based on observable market data (unobservable inputs)

59
 NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

2010 Level 1 Level 2 Level 3 Total

£m £m £m £m

Financial assets
Derivative financial instruments – 149.0 – 149.0
Available for sale securities – 363.2 – 363.2

Financial liabilities
Derivative financial instruments – 255.0 – 255.0

2009 Level 1 Level 2 Level 3 Total

£m £m £m £m

Financial assets
Derivative financial instruments – – – –
Available for sale securities – – – –

Financial liabilities
Derivative financial instruments – – – –

iii) Liquidity risk

Liquidity risk represents the risk of being unable to pay liabilities as they fall due and arises from the mismatch in cashflows generated from current and expected
assets, liabilities and derivatives. The Group has a robust liquidity management framework which was in place throughout 2010.
Under the framework, liquidity management had two key segments as follows:
•• Back book liquidity. Cashflows are generated from repayments and redemptions of retail customer loans and from maturities of Treasury investments. These
cashflows are used to repay liabilities as they fall due.
•• Front book liquidity. New lending to customers is required to be funded from new retail or new wholesale funding. Liquidity levels are maintained to meet
expected and unexpected levels of liquidity outflows, with any permanent surplus liquidity used to fund asset growth.
The liquidity framework governance structure operates within the Board’s delegated authorities and reports into the Liquidity Management Group (LMG), Asset
and Liability Committee (ALCO), Risk Committee, Executive Committee and Board.
The Treasury and Finance functions monitor liquidity on a daily basis, using daily cash flow liquidity reports, together with daily movement reports, liquidity
performance indicators, portfolio analyses and maturity profiles.
LMG reviews on a weekly basis the projected daily cash flows, to ensure that the key liquidity performance indicators are met. Any changes in legislation,
regulation or other guidance which may affect the Group’s liquidity position are reported directly to the Chief Financial Officer.
ALCO and the Risk Committee receive monthly liquidity analyses and profiles. ALCO generates policies and strategies to ensure that capital and liquidity
management are optimised to meet internal and external stakeholder requirements. ALCO reports directly to the Executive Committee, which makes
recommendations to the Board for its approval, and, similarly, the Risk Committee reports directly to the Board.
The table below analyses the Group’s assets and liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the
contractual maturity date. Amounts shown in respect of loans and advances to customers include fair value adjustments of portfolio hedging.
2010 After After After
3 months 6 months 1 year
Within but within but within but within After
3 months 6 months 1 year 5 years 5 years Total
£m £m £m £m £m £m

Assets
Cash and balances with central banks 4,615.1 – – – 30.9 4,646.0
Derivative financial instruments 2.3 7.8 26.3 112.2 0.4 149.0
Loans and advances to banks 575.2 10.0 – – – 585.2
Loans and advances to customers 113.1 109.8 222.2 1,946.8 9,982.5 12,374.4
Investment securities 105.0 219.4 71.3 27.4 237.9 661.0
Other assets 93.4 – 2.1 – 50.7 146.2

Total assets 5,504.1 347.0 321.9 2,086.4 10,302.4 18,561.8

Liabilities
Deposits by banks 0.7 – – – – 0.7
Customer accounts 9,348.0 959.1 3,472.5 3,123.6 – 16,903.2
Derivative financial instruments 2.2 7.8 18.0 159.4 67.6 255.0
Other liabilities 124.6 23.6 53.9 13.3 – 215.4

Total liabilities 9,475.5 990.5 3,544.4 3,296.3 67.6 17,374.3

Net liquidity gap (3,971.4) (643.5) (3,222.5) (1,209.9) 10,234.8 1,187.5

60
NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

2009 After After After

3 months 6 months 1 year
Within but within but within but within After
3 months 6 months 1 year 5 years 5 years Total
£m £m £m £m £m £m

Assets
Cash and balances with central banks 1,400.0 – – – – 1,400.0
Derivative financial instruments – – – – – –
Loans and advances to banks – – – – – –
Loans and advances to customers – – – – – –
Investment securities – – – – – –
Other assets 0.1 – – – – 0.1

Total assets 1,400.1 – – – – 1,400.1

Liabilities
Loans from HM Treasury 1,400.0 – – – – 1,400.0
Deposits by banks – – – – – –
Customer accounts – – – – – –
Derivative financial instruments – – – – – –
Other liabilities – – – – – –

Total liabilities 1,400.0 – – – – 1,400.0

Net liquidity gap 0.1 – – – – 0.1

Non derivative cash flows

The table below analyses the Group’s non derivative cash flows payable into relevant maturity groupings based on the remaining period at the balance sheet
date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows. These differ from balance sheet values due to the
effects of discounting on certain balance sheet items and due to the inclusion of contractual future interest flows.

2010 After After After

3 months 6 months 1 year
Within but within but within but within After
3 months 6 months 1 year 5 years 5 years Total
£m £m £m £m £m £m
Liabilities
Deposits by banks 0.7 – – – – 0.7
Customer accounts 9,369.9 998.0 3,660.9 3,327.1 – 17,355.9

9,370.6 998.0 3,660.9 3,327.1 – 17,356.6

2009 After After After

3 months 6 months 1 year
Within but within but within but within After
3 months 6 months 1 year 5 years 5 years Total
£m £m £m £m £m £m
Liabilities
Loans from HM Treasury 1,400.0 – – – – 1,400.0
Deposits by banks – – – – – –
Customer accounts – – – – – –

1,400.0 – – – – 1,400.0

61
 NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

Derivative cash flows
The following table analyses cash flows for the Group’s derivative financial liabilities that will be settled on a net basis into relevant maturity groupings based on
the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows. Derivatives
included within this analysis are single currency interest rate swaps.

2010 After After After

3 months 6 months 1 year
Within but within but within but within After
3 months 6 months 1 year 5 years 5 years Total
£m £m £m £m £m £m

Derivatives in economic but not accounting hedges (2.7) (4.4) (6.4) (9.3) 0.1 (22.7)
Derivatives in accounting hedge relationships (42.2) (36.6) (50.7) (114.1) (6.2) (249.8)

(44.9) (41.0) (57.1) (123.4) (6.1) (272.5)

2009 After After After

3 months 6 months 1 year
Within but within but within but within After
3 months 6 months 1 year 5 years 5 years Total
£m £m £m £m £m £m

Derivatives in economic but not accounting hedges – – – – – –

Derivatives in accounting hedge relationships – – – – – –

– – – – – –

iv) Operational risk

The Group defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events
including legal risk”. This accords with the Basel Committee’s definition of operational risk. In managing operational risk, the Group considers indirect financial
costs and regulatory, reputational and customer impacts.
The Group adopts the Standardised Approach to Operational Risk management and external benchmarking has confirmed that the Group is in line with the
FSA’s related qualifying criteria. The Group has a well documented risk management framework with appropriate reporting of risk events and risk exposures to
the Executive Committee and the Risk Committee.
Business units and functions formally assess their operational risks on an ongoing basis via a prescribed Risk Control Self Assessment (RCSA) process. The RCSA
analysis is reviewed and updated to reflect changes to the risk and control environment arising from changes in products, processes and systems.
The management of operational risk has been further strengthened during 2010 by:
•• Upgraded mortgage fraud and Anti Money Laundering systems
•• Strengthening of Business Continuity capability through syndicated third party recovery sites
•• Aligning the Information Security policy framework standards to ISO27001.
The Group calculates its capital requirement for operational risk using the Basel II Standardised Approach.

v) Legal risk
The Group defines legal risk as “the risk of legal sanction, material financial loss or loss to reputation the Group may suffer as a result of its failure to comply with
the law, inadequately document its contractual arrangements or inadequately assess and implement changes required by forthcoming legislation or emerging
case law”.
To manage the risk, the Group has a dedicated Legal function headed by an independent Legal professional who reports to the Executive Chairman. The
Risk Management Framework includes a Legal Risk Policy within which the Board has set a zero risk appetite (i.e. full compliance) in relation to legal risk, and
standards that the business is expected to operate within. The framework also includes the governance and policy controls to enable identification of key legal
risks, and of prevailing and emerging legal risk developments, issues and trends. The impacts of these developments on the Group are then assessed by the
business and Legal function.

vi) Regulatory risk

Regulatory risk is defined as the “risk of the Group failing to comply with the legal and regulatory requirements applying to its 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
•• Northern Rock plc being used for the purposes of financial crime”.
To manage the risk, the Group has a dedicated Compliance function reporting to the Chief Risk Officer. The Risk Management Framework includes a Regulatory
Risk Policy within which the Board has set a zero risk appetite (i.e. full compliance) in relation to regulatory risk, and standards that the business is expected to
operate within. The framework also includes the governance and policy controls to enable identification of key regulatory risks, and of prevailing and emerging
regulatory risk developments, issues and trends. The impacts of these developments on the Group are then assessed by the business and Compliance function.
In addition to ensuring compliance with new developments, the framework requires ongoing review and challenge of the Group’s compliance related processes
and practices. It also requires the monitoring of consistent application of policies, on a risk based approach. The results of the reviews are reported to the
Executive Committee, Risk Committee and Audit Committee on a regular basis.

62
NOTES TO THE ACCOUNTS (continued)

31. Financial risk management (continued)

B) Capital Management
The Group manages its capital resources to meet the regulatory requirements established by its regulator, the FSA. Capital adequacy is monitored on an ongoing
basis by the Group’s executive management and Board, based on the regulations established by the FSA. The required capital information is filed with the FSA
on a quarterly basis.
During 2010, the Group applied the Advanced Internal Ratings Based (AIRB) approach for residential mortgages and the Standardised approach for treasury
portfolios and operational risk.
Northern Rock plc’s total available capital resources are shown in the table below. Total capital resources of the Company are available without restriction in
order to meet its regulatory capital requirement. The Company complied with all of the externally imposed capital requirements to which it is subject.

2010 2009
£m £m
Core Tier 1
Ordinary share capital 1,400.0 0.1
Retained earnings (211.6) –
Pension scheme (2.8) –

Total Core Tier 1 capital 1,185.6 0.1

Regulatory deductions from Tier 1 (42.5) –

Tier 1 capital after deductions 1,143.1 0.1

Total available capital resources 1,143.1 0.1

C) Contingent Liabilities
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme (“FSCS”) is the UK’s statutory fund of last resort for customers of authorised financial services firms and pays
compensation if a firm is unable to pay claims against it. The FSCS has borrowed from HM Treasury to fund the compensation costs associated with institutions
that failed in 2008 and will receive the receipts from asset sales, surplus cash flows and other recoveries from these institutions in the future.
The FSCS meets its obligations by raising management expense levies. These include amounts to cover the interest on its borrowings and compensation levies
on the industry. Each deposit-taking institution contributes in proportion to its share of total protected deposits.
In 2010, the Group has accrued £7.6m in respect of its current obligation to meet management expense levies (2009 £nil).
If the FSCS does not receive sufficient funds from the failed institutions to repay HM Treasury in full, it will raise compensation levies. At this time, it is not
possible to estimate the amount or timing of any shortfall resulting from the cash flows received from the failed institutions and, accordingly, no provision for
compensation levies, which could be significant, has been made in these financial statements.

32. Collateral pledged and received

Cash collateral is given and received as part of normal derivative operations. At 31 December 2010, £91.0m (2009 £nil) had been pledged and £0.7m (2009 £nil)
had been received as cash collateral. In addition the Group has pledged securities collateral with a value of £27.9m (2009 £nil).
All collateral balances are the same in Group and Company.

63
 NOTES TO THE ACCOUNTS (continued)

33. Related party transactions

A number of banking transactions are entered into with related parties as part of normal banking business. These include loans and deposits. The volumes of
related party transactions, outstanding balances at the year end and related income and expense for the year are set out below.
Directors and key
management personnel

2010 2009
£m £m

Loans
Loans outstanding at 1 January 2010 / 3 July 2009 – –
Transfer of loans from Northern Rock (Asset Management) plc 1.0 –
Net amounts repaid (0.8) –

Loans outstanding at 31 December 0.2 –

Interest income paid – –

At 31 December 2010, directors and key management personnel held deposits of less than £0.1m (2009 £nil).
2010 2009
£m £m

Directors and key management personnel

Salaries and other short term benefits 5.0 –
Post-employment benefits 0.6 –

5.6 –

The Company regards the Government as a related party. Details of loan facilities with the Government are set out in note 24 above.
In addition to these loans and guarantees the Group has transactions with numerous Government bodies on an arm’s length basis in relation to the payment
of corporation tax, value added tax and employment taxes and the payment of regulatory fees and levies. Transactions with these entities are not disclosed
owing to the volume of transactions conducted.
At 31 December 2010, the Company holds cash with the Bank of England of £4,607.0m (2009 £1,400.0m). In addition the Company has made loans and advances
to banks under government control of £265.0m (2009 £nil) and has derivative financial instrument assets with counterparties under government control of
£50.3m (2009 £nil).
There are service level agreements in place between the Company and Northern Rock (Asset Management) plc and Bradford & Bingley plc. Under the terms
of the agreement, the Company provides a number of services to Northern Rock (Asset Management) plc and Bradford & Bingley plc, including IT and various
administrative services, and as a result received income in 2010 of £168.3m (2009 £nil). In addition Northern Rock (Asset Management) plc provides certain
treasury services to the Company for which the Company paid £0.7m in 2010.
At 31 December 2010, the balance owing to the Company from Northern Rock (Asset Management) plc is £74.4m (2009 £nil). This amount is unsecured and is
recorded in other assets in the balance sheet.
Northern Rock (Asset Management) plc provides an indemnity to the Company against potential claims arising from past business up to a maximum of £100m.

34. Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with less than three months maturity from the date
of acquisition:
Group Company
2010 2009 2010 2009
£m £m £m £m

Cash and balances with central banks 4,615.9 1,400.0 4,615.9 1,400.0
Loans and advances to banks 575.2 – 569.7 –

5,191.1 1,400.0 5,185.6 1,400.0

35. Ultimate controlling party

The Company considers Her Majesty’s Government to be the ultimate controlling party.

64
CONTENTS
Executive Chairman’s Statement 1
The Board 3
Corporate Governance 4
Directors’ Remuneration Report 8
Corporate Social Responsibility Report 12
Operating and Financial Review 14
Directors’ Report 19
Independent Auditors’ Report
to the Shareholder of Northern Rock plc 22
Consolidated Income Statement 23
Consolidated Statement of Comprehensive Income 24
Consolidated Balance Sheet 25
Company Balance Sheet 26
Consolidated Statement of Changes in Equity 27
Company Statement of Changes in Equity 28
Consolidated Cash Flow Statement 29
Company Cash Flow Statement 30
Notes to the Accounts 31

Presentation of Information
On 17 February 2008, the Chancellor of the Exchequer announced that the Government had decided to take Northern Rock into a period of temporary pub-
lic ownership and on 22 February 2008 the Banking (Special Provisions) Bill received Royal Assent. HM Treasury made an order on 22 February 2008 which
transferred all of the Ordinary, Preference and Foundation Shares in Northern Rock to the Treasury Solicitor as the Treasury’s nominee.
The legislation includes provisions such that Change of Control provisions in any of the Company’s contractual arrangements have not been triggered.
Details of the impact of temporary public ownership are given throughout this Annual Report and Accounts as it affects the Company’s operations and finan-
cial disclosures.
As Northern Rock has previously published financial statements which have been prepared in accordance with EU endorsed International Financial Reporting
Standards (“IFRS”), IFRIC interpretations and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS, it continues to do so.
Northern Rock plc, Registered Office: Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PL
Registered in England and Wales under Company Number 06952311   www.northernrock.co.uk