Ivona Poyntz 2010 nr plc_financial_report_and_accounts
CONTENTSExecutive Chairman’s Statement 1The Board 3Corporate Governance 4Directors’ Remuneration Report 8Corporate Social Responsibility Report 12Operating and Financial Review 14Directors’ Report 19Independent Auditors’ Reportto the Shareholder of Northern Rock plc 22Consolidated Income Statement 23Consolidated Statement of Comprehensive Income 24Consolidated Balance Sheet 25Company Balance Sheet 26Consolidated Statement of Changes in Equity 27Company Statement of Changes in Equity 28Consolidated Cash Flow Statement 29Company Cash Flow Statement 30Notes to the Accounts 31Presentation of InformationOn 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 whichtransferred 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 ReportingStandards (“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 STATEMENTNorthern Rock plc (the “Company”) commenced trading on The Government’s guarantee of retail deposits was lifted on1 January 2010 following completion of the legal and capital 24 May 2010 for variable rate accounts, reflecting the Company’srestructuring of the former Northern Rock business, which created strong capital and liquidity position. Fixed rate accounts openedtwo separate entities: before 24 February 2010 keep the guarantee for the life of the product. Northern Rock plc remains a member of the UK Financial• Northern Rock plc, a new retail bank authorised by the FSA, and Services Compensation Scheme (FSCS), which provides protection• Northern Rock (Asset Management) plc (NRAM), now one of of up to £85,000 per person for eligible depositors. the companies under the control of UK Asset Resolution Limited Guarantees on certain wholesale deposits of Northern Rock plcNorthern Rock plc is authorised and regulated by the Financial were lifted on 2 November 2010. Fixed term wholesale depositsServices Authority (FSA) as a mortgage provider and deposit taker. existing on 1 January 2010 will retain the guarantee to maturity.The Company remains in Government ownership, but the intention The Company is strongly capitalised, with both a Tier 1 and Totalremains to return it to the private sector when conditions are right Capital ratio of 31.6%, and holds a high level of liquidity to supportto do so. the retail deposit book and new lending activity.FINANCIAL AND OPERATIONAL PERFORMANCE During the year the workforce was reduced to align the number2010 represented Northern Rock plc’s first year of trading. of staff with the smaller size of the Company and a lower levelThe Company has made good progress in its first year and its of new business activity. As a result of this, approximately 650financial performance is in line with expectations for the twelve jobs were made redundant. In addition, as part of the separationmonths to 31 December 2010. Reflecting the low interest of Northern Rock plc from Northern Rock (Asset Management)rate environment, along with significant non‑recurring costs, a plc, approximately 1,250 staff were transferred to Bradford &loss of £223.5 million was reported for the year, with a loss Bingley plc.of £80.9 million in the second half compared with a loss of£142.6 million in the first half of the year. GOVERNANCE The Board contains strong banking and operational expertise whichThe loss incurred reflects the difficult trading environment for are considered essential to oversee the activities of Northern Rocka small bank, dependent upon retail funding, which continued plc and its ultimate return to the private sector.throughout 2010. This included the prevailing low interest rate andsubdued mortgage market. The Company also incurred significant Following the departure of Gary Hoffman as Chief Executive, whocosts relating to the Government’s retail and wholesale guarantees, stepped down from the Board on 4 November 2010, I revertedwhich have now been removed, and the high level of liquidity held. from Non Executive to Executive Chairman. I was previouslySignificant non‑recurring costs were also incurred as the Company appointed to this role by the Government, in February 2008, whenwas separated from NRAM. However, the loss in the second half of the former business entered public ownership. The Board and UKFIthe year was £61.7 million less than in the first half demonstrating considered that this would provide continuity of leadership andthat progress is being made. management required at this time.The Company continued to support capacity in the UK mortgage Rick Hunkin, Chief Risk Officer (CRO), stepped down from themarket, with gross mortgage lending (including retention Board and left the Company on 31 December 2010. Keiran Foadbusiness) during the year of £4.2 billion. Net residential lending has been appointed as the new CRO and joined the Company onof £1.9 billion in 2010 increased balances to £12.2 billion at 1 March 2011.31 December 2010. The quality of new lending remained high, The Board has five Non Executive Directors; Laurie Adams, Richardwith an average loan‑to‑value (LTV) ratio of new lending at Coates, Mike Fairey, Mark Pain and Mary Phibbs. Jim McConville,62% compared with the average for the book of 59%. Careful Chief Financial Officer, also sits on the Board as an Executiveunderwriting processes and affordability for customers are key Director of the Company.considerations in our mortgage lending.Northern Rock plc is predominantly funded by retail deposits. Retail REMUNERATIONbalances were £16.7 billion at 31 December 2010, compared Northern Rock plc needs to attract and retain colleagues with thewith £17.6 billion at 30 June 2010 and remained within the appropriate skills and experience to drive company performancecap imposed under EC State Aid rules. The reduction in retail and deliver value for taxpayers. Therefore it is essential that andeposit balances over the year is as expected and reflects active appropriate remuneration framework is in place.management of the retail savings book, such as the commercial For 2010 performance, the Remuneration Committee have agreed adecision to close the Guernsey savings operation, as well as the bonus scheme for all colleagues, including senior management, withrelease of the Government’s savings guarantee. 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 OUTLOOK appropriate, including relevant deferral conditions. Economic conditions remain challenging. The mortgage market in the UK continues to be relatively subdued, and the interest rate NORTHERN ROCK IN THE COMMUNITY environment continues to act as a headwind for retail banks and Northern Rock has been a substantial contributor to the wider building societies. community over many years, both through the Northern Rock As anticipated, Northern Rock plc was loss making for the full Foundation and through a wide and varied programme of charitable year but with a significantly improved financial performance in the work, undertaken by colleagues throughout the business. second half of 2010. The Board looks forward to the maintenance During 2010, Northern Rock’s community strategy has been of that momentum in 2011, through providing customers with refocused towards helping communities in financial difficulty, attractive products and high standards of service, exploring utilising the skills and experience inherent within the Company. opportunities for cautiously and prudently expanding the product We have engaged with The Northern Rock Foundation and more range, and continuing to focus on cost control. widely to ensure our programme is focused on the areas of A key objective of Northern Rock plc is a return to the private greatest need. sector when the time is right, in the taxpayers best interests. The In line with the commitment made when first taken into public selection process for corporate finance advisers to work with the ownership, the Foundation received a donation of £15 million Company and UKFI on the evaluation of strategic options for from NRAM in 2010. Such donations enable the Foundation to Northern Rock is ongoing. support community and charitable causes, mainly in the North My colleagues across the business remain committed to delivering East of England and Cumbria. Going forward, Northern Rock plc the highest standards of service and fair treatment of our customers has entered into a two year rolling agreement to donate 1% of and I pay tribute to the quality of what they have delivered. profits before tax to the Foundation. This maintains the Company’s commitment to corporate and social responsibility and allows the Ron Sandler Foundation to continue its valuable work. Executive Chairman 8 March 20112
THE BOARDDuring 2010, the number of meetings attended by each Director was as follows: Board Audit Remuneration RiskNumber of meetings held in 2010 16 8 10 8Executive ChairmanR A Sandler CBE 16/16 10/10Non – Executive DirectorsL P Adams 14/16 10/10 8/8J R Coates 16/16 8/8 7/8M A Pain 15/16 6/6 7/8M C Phibbs 16/16 7/8 7/8M E Fairey 12/16 4/8 10/10Executive DirectorsG A Hoffman(resigned 4 November 2010) 13/13R D Hunkin(resigned 31 December 2010) 15/16J McConville(appointed 8 April 2010) 13/13During 2010 the Chairman of each Committee was as follows:Risk Committee – Mr AdamsAudit Committee – Mr CoatesRemuneration Committee – Mr FaireyNominations Committee – Mr Sandler.The Nominations Committee did not meet during 2010. All matters with regard to Board membership and succession were discussed andagreed 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 Mary Phibbs – Non‑Executive Director nominee for Her Majesty’s Treasury and consequently, the full Mary is a Non‑Executive Director and Trustee for the Charity Bank requirements of the UKLA’s Listing Rules and the regulations under Limited. She is a Senior Advisor for Alvarez and Marsal and acting the Companies Act 2006 governing Director’s remuneration on their behalf as the interim Chief Risk Officer for Allied Irish (the Regulations), now known as the UK Corporate Governance Bank. In a 30 year career in Banking and Finance she has held a Code (the Code), do not apply to the Company. variety of senior executive positions with Standard Chartered Bank, the Australia and New Zealand Bank, the National Australia Bank, This corporate governance section summarises: Bankers Trust Australia and the Commonwealth Bank Group. She is • The composition of the Board at the date of this report; and a Chartered Accountant. • The governance regime in place at the date of this report. Mike Fairey – Non‑Executive Director The Operating and Financial Review on pages 14 to 18 also Mike was the Deputy Group Chief Executive of Lloyds TSB Group addresses certain governance matters in relation to events in 2010. PLC from 1998 until his retirement in June 2008. Mike is Chairman of the Lloyds TSB pension funds, a Non‑Executive Director of the COMPOSITION OF THE BOARD Energy Saving Trust and Vertex Data Sciences and president of the British Quality Foundation. The Directors in office at the date of this report are: Jim McConville – Chief Financial Officer Ron Sandler – Executive Chairman Jim has more than 20 years experience in the UK retail banking Ron was Executive Chairman of the former Northern Rock between and insurance sectors, having held a number of senior finance and February 2008 and October 2008, and was Chairman of that strategy related roles in Lloyds Banking Group, including Finance company until January 2010, when it became Northern Rock Director of the Insurance and Investments Division and Scottish (Asset Management) plc. He was appointed Chairman of Northern Widows Group. Jim is responsible for Finance and Treasury at Rock plc in January 2010 and appointed as Executive Chairman Northern Rock plc. in November 2010. Ron was previously Chief Executive of Lloyd’s of London from 1995 to 1999, and was subsequently Chief The Company does not have a Chief Executive at the date of this Operating Officer of Natwest Group. He is Chairman of Phoenix report. Mr Hoffman was appointed as Chief Executive on 1 January Group Holdings and Ironshore Inc. 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 provisions of the Framework Document, The Directors to retire by rotation or as otherwise may be agreed with UKFI, would be those in office longest sinceOVERVIEW takes appropriate account of best practice their previous re‑election. Non‑ExecutiveSince the restructuring of Northern Rock for a company listed on the Official List, Directors are appointed for aon 1 January 2010, the governance has including the Code. specified term subject to re‑election inbeen regulated principally by a framework accordance with the above proceduresdocument (the “Framework Document”) The Board operates the following mainagreed between the Company and UK committees: • The Board ensure that suitably rigorousFinancial Investments Limited (UKFI) as appraisals are made of the effectiveness • Audit Committee of the Chairman, the Board and itsmanager of HM Treasury’s shareholdingin the Company. This sets out how the • Risk Committee Committeesrelationship between the Company and • Remuneration Committee • UKFI has certain monitoring andUKFI works in practice. • Nominations Committee. information access rights, and its consent has to be obtained for certain The work of these committees isBASIC PRINCIPLES material transactions. described below.The basic relationship between theCompany and UKFI operates according to THE BOARD BOARD APPOINTMENTS ANDthe following principles under which UKFI: The Board met 16 times during 2010 and MONITORING the details of attendance at the Board and• Appoints the Chairman of the Board It is a key principle of the Framework Committee meetings are given on page 3. and is entitled to appoint one or more Document that UKFI and the Chairman Where Directors were absent from Board or Non‑Executive Directors share a common view about Board Committee meetings, on each occasion the• Is required to give its consent for the composition (including size, balance Board or respective Committee was satisfied appointment of other members of the of experience and background) and with the apologies that were offered. Board proposed for appointment by succession. To achieve this: the Nominations Committee and agrees The Board has a written schedule of matters • The Chairman and either the Chairman the terms on which the Directors are reserved for its determination. Reserved of UKFI or a senior employee appointed and incentivised matters include corporate governance nominated by the Chairman of UKFI arrangements and the relationship with• Agrees with the Board the high level (the Nominated Official) will discuss UKFI, responsibility for overall management objectives of the business plan and any and confirm Board composition and of the Company’s long‑term objectives and revisions to it succession regularly in the light of commercial strategy, financial reporting and• Reviews with the Board from time to performance and the requirements of control, setting an appropriate risk appetite time the Company’s strategic options the business plan and maintaining a sound system of internal• Requires that the Board is accountable • One or more senior representatives control and risk management, and the approval to it for delivering the agreed business of UKFI will, if so requested by UKFI, of half yearly, interim management statements plan attend meetings of the Board and and the Annual Report and Accounts. Committees in an observer capacity• Gives the Board the freedom to take the action necessary to deliver the • The Chairman will discuss with the BALANCE OF EXECUTIVE AND business plan Nominated Official any impending NON‑EXECUTIVE DIRECTORS changes to Board membership More than half of the Board comprises• Monitors the Company’s performance Non‑Executive Directors, all of whom have to satisfy itself that the business plan is • The Chairman of the Nominations Committee will meet with the experience in a range of commercial or on track Nominated Official as necessary to banking activities.• Must give its consent for certain obtain UKFI’s approval to any proposed significant actions. BOARD COMMITTEES Board changes before they become In accordance with the requirements inIMPLEMENTATION OF BASIC subject to the formal appointment/ the Framework Document the Board has aPRINCIPLES consent procedure number of Committees. The Chairman andBOARD STRUCTURE AND GOVERNANCE • The Company’s Articles of Association membership of each Committee are set require that each Director stands forIn accordance with the Framework out below. re‑election at least every three years andDocument, the Company operates a that Directors appointed by the Board Each Committee has detailed terms ofcorporate governance structure which, so should be subject to election at the first reference clearly setting out its remitfar as practicable and in light of the other opportunity after their appointment. and authority. The terms of reference 5
CORPORATE GOVERNANCE (continued) are regularly reviewed by the Board reports of reviews conducted throughout delegate to the Committee authority from and were updated and re‑approved in the Company by the Internal Audit function. the Board to approve new risk policies and September 2010. amendments to existing policies. To assist The Audit Committee met eight times the Board in discharging its responsibilities The following paragraphs set out details in 2010. In February 2010, the Audit for the setting of risk policy, the Risk of the Committees and the particular work Committee reviewed and confirmed the Committee regularly reviews the Company’s that they undertake. effectiveness of the external auditors. material risk exposures in relation to the The external auditors were consequently AUDIT COMMITTEE Board’s risk appetite and the Company’s re‑appointed at the 2010 Annual General The Audit Committee currently comprises capital adequacy. Meeting until the conclusion of the next Messrs Coates (Chairman), Pain, Fairey and Annual General Meeting. The Risk Committee also ensures that the Ms Phibbs. public disclosure of information regarding RISK COMMITTEE the Company’s risk management policies The Committee considers and, where The Risk Committee currently comprises and key risk exposures is in accordance appropriate, advises the Board on all Messrs Adams (Chairman), Coates, Pain and with statutory requirements and financial matters relating to regulatory, prudential Ms Phibbs. reporting standards. and accounting requirements that affect the Company. It reports to the Board on The main role of the Risk Committee is to The Risk Committee met eight times during both financial and non‑financial controls review, on behalf of the Board, the key risks 2010. and monitors the integrity of the financial inherent in the business, the systems of statements of the Company and any formal control necessary to manage such risks, and NOMINATIONS COMMITTEE announcements relating to the Company’s to present its findings to the Board. The Nominations Committee currently financial performance. As part of its remit it comprises Messrs Sandler (Chairman) and This responsibility requires the Risk Committee oversees anti‑money laundering and whistle Adams. to keep under review the effectiveness of the blowing procedures. Company’s risk management frameworks and Subject to compliance with the An important aspect of its role is to systems of internal control, which includes requirements of the Framework Document ensure that an objective and professional financial, operational, compliance and risk (as set out above), the Committee monitors relationship is maintained with the management controls and to foster a culture and reviews the membership of, and external auditors. The Audit Committee that emphasises and demonstrates the benefits succession to, the Board of Directors and has responsibility for recommending the of a risk‑based approach to internal control the Committee makes recommendations appointment, re‑appointment and removal and management of the Company. The Risk to the Board in this regard. One of its of the external auditors. Committee fulfils this remit by reinforcing functions is to identify potential Executive management’s risk management awareness and Non‑Executive Directors taking into The Audit Committee reviews the scope and making appropriate recommendations to account the requirement for the members and results of the annual external audit, its the Board on all significant matters relating of the Board to have an appropriate range cost effectiveness, and the independence to the Company’s risk appetite, strategy and of skills and experience. and objectivity of the external auditors. policies. It is also responsible for considering It also reviews the nature and extent of any The Committee did not meet during 2010 the current and prospective macroeconomic non‑audit services provided by the external as all matters in relation to the composition and financial environment. auditors. The external auditors can attend of the Board were considered by the Board. all meetings of the Audit Committee, have The Risk Committee regularly reviews reports direct access to the Committee and its from Compliance including regulatory REMUNERATION COMMITTEE Chairman at all times and are invited at risks and issues and is also responsible for The Remuneration Committee currently least annually to meet with the Committee approval, and ongoing review and oversight of comprises Messrs Fairey (Chairman), in the absence of management. progress of the compliance monitoring plan. Sandler and Adams. The Committee also receives reports from Subject to compliance with the requirements The Head of Internal Audit provides further Compliance in relation to its responsibility to of the Framework Document (as set out assurance that the significant risks identified consider any major findings of the Financial above), the Committee is responsible for by the business are properly managed Services Authority and management’s considering and advising the Board on the through attendance at key committees response to any risk management review remuneration policy for Executive Directors and delivery of the risk based audit plan. undertaken by the Chief Risk Officer, Internal and the Chairman, and for determining The Head of Internal Audit also has direct Audit or the external auditors. their remuneration packages. In discharging access to the Audit Committee and its Chairman. The Committee regularly receives The Risk Committee terms of reference its responsibilities, the Remuneration were revised in September 2010 to6
CORPORATE GOVERNANCE (continued)Committee can take professional advice from • Customer Performance Committee the Board and the interaction between thewithin and outside the Company. Board and its Committees. INDUCTION AND TRAININGIt is the Board’s responsibility to determine The outcome of the evaluation exercise It is the Company’s policy that every Directorthe remuneration policy for Non‑Executive was reported to the Board and showed should receive appropriate training whenDirectors within the limits set out in the that the Board and its Committees were appointed to the Board, and subsequentlyArticles of Association. The Remuneration discharging their responsibilities effectively. as necessary. The Company’s personalisedCommittee also determines the level of The appraisal produced a number of induction process is designed to ensureremuneration for the Company’s Executive recommendations to further improve that every new Director understands theirCommittee Directors (comprising management effectiveness of the Board which will be responsibilities as a Director of the Company.at the level immediately below the Board). implemented during 2011. The Board Governance Manual supports thisThe Committee met ten times during 2010. process. The process also enables Directors INTERNAL CONTROL AND RISK to build an understanding of the Company, its MANAGEMENTEXECUTIVE COMMITTEE business and the market in which it operates. A description of the Company’s approachThe Board delegates authority to the To enable the Board to function effectively, to all aspects of financial and other riskExecutive Committee to oversee the all Directors have full and timely access to management and the related use ofprudent day to day management of all information which may be relevant to the derivatives is set out in notes 16 and 31 tothe Company’s affairs. The Committee discharge of their duties and obligations. The the Accounts. Material risk exposures arecomprises Mr Sandler (Executive Chairman), Company also arranges additional, specific maintained within the Board approved riskMs Belsham (Director of Transition training and support for any Director who appetite and are subject to Board policyManagement), Mr Fitzpatrick (General requests it. The Chairman ensures that all statements which further define specificCounsel and Company Secretary), Mr Foad Directors are properly briefed on issues to exposure limits and controls, appropriate to(Chief Risk Officer), Ms Lauder (Customer be discussed at Board meetings. All Directors each of the risks concerned.Service & Sales Director), Mr McConville(Chief Financial Officer), Mr Parker (Chief are able to obtain further advice or seek The Board of Directors is responsible forOperating Officer), Mr Tate (Customer & clarity on issues raised at Board meetings the Company’s system of risk management,Commercial Director) and Mrs Thompson from within the Company or from external regulatory compliance and internal control.(HR Director). professional sources. All Directors have access The systems are designed to ensure that to the advice and services of the Company the key risks taken by the Company in theThe Committee considers, in the first Secretary who is responsible for ensuring that conduct of its business are identified andinstance, all reports made to the Board Board procedures and applicable rules and evaluated so that appropriate controls areand Board Committees, except in relation regulations are observed. put in place to manage those risks. Suchto matters reserved to the Board for Where necessary, Directors are able to systems are designed to manage rather thanits own determination. The function of take independent professional advice at the eliminate the risk of failure to achieve businessthe Committee and its sub‑committees, Company’s expense. objectives and can only provide reasonable,together with a description of the role and but not absolute, assurance against materialresponsibilities of the Committee members, is BOARD EVALUATION misstatement or loss. The Board of Directorsset out in the Executive Governance Manual. In November 2010, a Board effectiveness has reviewed the system of internal controlA Delegated Authorities Manual which appraisal was conducted by the Chairman and is not aware of any significant failures inspecifies the level of authority to be with assistance from the Company internal control that arose in the business ofexercised by the Executive Committee and Secretary. All Executive Directors, the Company during 2010 and up to thevarious individuals also exists. Non‑Executive Directors and the Chairman date of approval of the accounts that haveThe following sub‑committees which report participated in an evaluation of the Board not been dealt with in accordance with theto the Executive Committee are in place. and its Committees to ensure that their internal control procedures of the Company. operation continued to be of the highest The Company’s Internal Audit function• Operating Plan Committee standard. The evaluation process consisted provides a degree of assurance as to the• Capital Management Committee of a series of meetings with Directors that operation and validity of the system of canvassed their views on a wide range of• Retail Products and Limits Committee internal control through the delivery of a matters including the effectiveness of the• Asset and Liability Committee Board, its Committees and the Chairman. In risk based audit plan. The agreed corrective actions arising as a result of that plan• Retail Credit Risk Committee addition, the evaluation also considered the are independently monitored for timely• Operational Risk and Compliance Board meeting process, the composition of completion. Committee 7
DIRECTORS’ REMUNERATION REPORT The issued shares of the Company are qualifications, skills and experience. resigned as a Director and left the held by the Treasury Solicitor and the The following persons and advisors Company on 31 December 2010 without requirements of both the Companies Act provided advice or services to the any compensation being paid. 2006 governing disclosure of Directors’ Committee during 2010: remuneration (the Regulations) and the BASIC SALARY: • Internal support was provided by UK Corporate Governance Code (the Code) The Committee’s objective was that the Company Secretary and Human do not apply to the Company. However, Executive Directors’ basic salaries should be Resources Director; throughout 2010 and in preparing this paid at an appropriately competitive level. report, the Company has voluntarily • The Chief Executive (and Executive During 2010, the Committee undertook complied in all material respects with both Chairman after 4 November 2010) an extensive benchmarking exercise on the Regulations and the provisions of the provided advice in relation to the Executive Director remuneration and Code relating to Directors’ remuneration. Executive Committee members; concluded that no basic salary increases should take effect during 2010. Relevant This report is divided into three • Hewitt New Bridge Street LLP provided salary information is as follows: sections. The first section reports on advice on various matters, including the remuneration policies applied by the the design of the Long Term Incentive Mr Hoffman was paid a salary of £700,000 Company during 2010 and the application Scheme which is to be implemented per annum; of these to specific Directors. The second during 2011; Mr Hunkin was paid a salary of £275,000 section reports on the remuneration • Mercer Limited, who are the consulting per annum; and arrangements to be applied by the actuaries to the Company, advised Company for 2011. The third section Mr McConville was paid a salary of on various pension issues relating to sets out detail of Directors’ individual £350,000 per annum. Directors and employees; and remuneration for 2010. • Freshfields Bruckhaus Deringer BONUS SCHEME: REMUNERATION POLICIES AND LLP, being the Company’s principal In order to encourage a high performance THEIR APPLICATION TO DIRECTORS legal advisers, advised on various culture with close alignment to corporate DURING 2010 remuneration and service contract values and with the approval of UKFI, the matters and on compliance with the Committee established a company‑wide THE REMUNERATION COMMITTEE bonus scheme for 2010 which linked Regulations. The Remuneration Committee (the a proportion of remuneration to the Committee) operated within agreed terms REMUNERATION POLICIES FOR performance of the Company. of reference and consisted of Mr Fairey EXECUTIVE DIRECTORS (Chairman) and Mr Adams, and the Under the scheme, the payment of any During 2010, the Board adopted a Chairman of the Company, Mr Sandler. bonus was subject to the Company company‑wide remuneration policy with It met on 10 occasions during 2010. achieving a financial threshold evidenced by the aim of attracting, developing and a sustained improvement in the Company’s The Committee was responsible for retaining people with the appropriate financial and operational performance over making recommendations to the Board skills, knowledge and expertise to run the relevant financial year within a prudent on the Company’s general policy relating the company effectively. This policy risk management framework. The quantum to executive remuneration and for also applied to the Company’s Executive of the bonus pool made available was determining, on behalf of the Board, specific Directors whose remuneration packages determined by the Board following an remuneration packages for the Chairman, comprised basic salary, bonus, pension assessment of corporate performance the Executive Directors and the members of benefits and certain other benefits in kind. against a series of scorecard objectives the Executive Committee, being the most During the year, Mr Hoffman, Mr Hunkin that were set in February 2010. senior tier of management of the Company. and Mr McConville served the Company as The Chairman and the Chief Executive were The level of individual bonus award under Executive Directors. On 4 November 2010, not present when their own remuneration the scheme was based on an assessment of Mr Hoffman stood down as Chief Executive was under consideration. achievement against personal objectives. and was placed on “gardening leave” until The maximum level of bonus payable to The Committee took advice from both 30 April 2011 with full contractual benefits Executive Directors was 120% of basic inside and outside the Company on a being paid. On 5 November, Mr Hoffman annual salary, with “on target” performance range of matters, including the scale and voluntarily waived all remuneration that resulting in a bonus level of 84%. composition of the total remuneration was to be paid to him whilst on “gardening If individual performance was deemed to be package payable in comparable financial leave”. No lump sum termination payment unacceptable, no bonus was payable. institutions to people with similar was made to Mr Hoffman. Mr Hunkin8
DIRECTORS’ REMUNERATION REPORT (continued)Mr McConville received a bonus award of contract contained a provision whereby if REMUNERATION POLICIES FOR THE£185,000. No awards were made to either terminated other than for gross misconduct, CHAIRMAN AND NON‑EXECUTIVEMr Hoffman or Mr Hunkin. he would remain entitled to any outstanding DIRECTORS payments to which he was entitled as The fees for the Chairman and Non‑Under the scheme rules, any bonuses compensation for the loss of his long term Executive Directors described below werefor Executive Directors for the financial incentive arrangements with his previous set with reference to external benchmarksyear ended 31 December 2010 will employer (as set out in the footnote to the and at levels sufficient to attract the calibrebe paid in accordance with the FSA Directors’ Individual Remuneration table on of individual needed to oversee the strategyRemuneration Code. page 11). As referred to above, Mr Hoffman and management of the Company whilst inPENSION BENEFITS: stood down as Chief Executive and resigned Temporary Public Ownership. The ExecutiveThe Company paid an amount equal to from the Board on 4 November 2010. Chairman and the Non‑Executive Directors40% of Mr Hoffman’s annual salary towards were entitled to fees from the Company but Mr Hunkin served the Company under apension arrangements maintained by him and, were not permitted to participate in bonus, service contract dated 18 August 2008,in respect of Mr Hunkin and Mr McConville, incentive or pension schemes or receive terminable by the Company serving15% of their annual salary towards pension benefits in kind, other than reimbursement 12 months’ notice or by Mr Hunkinarrangements maintained by them. for travel and other reasonable expenses giving 6 months’ notice. Mr Hunkin incurred in the furtherance of their resigned as a Director with effect fromBENEFITS IN KIND: duties and in attending Board and 31 December 2010.Executive Directors were also entitled to a Committee meetings.car and fuel allowance and the benefit of Under the terms of a services agreement Mr Sandler commenced his appointmentincome protection and medical insurance between Northern Rock (Asset as Non‑Executive Chairman on 1 Januaryarranged by the Company on their behalf. Management) plc (NRAM) and the 2010 and served the Company under aIn addition, Mr Hoffman and Mr McConville Company dated 7 December 2009, the letter of appointment dated 22 Decemberwere entitled to the reimbursement of Company was required to provide certain 2009. On 4 November 2010, Mr Sandlercertain accommodation and travel expenses. services to NRAM for a period of time was appointed Executive Chairman with following its restructuring. In accordance no increase to his fee of £250,000 perEXECUTIVE DIRECTORS’ SERVICE with the services agreement, the Company annum. Unless otherwise extended by theCONTRACTS invoiced NRAM monthly in arrears for the Company, his appointment terminates onMr McConville serves under a service cost of services rendered to it plus a margin 31 December 2012 or on either partycontract dated 14 December 2010. of ten per cent. On this basis, 50 per serving four months’ notice at any time.The contract is terminable by the Company cent of employment costs relating to In anticipation of a return to the privateon 24 months’ notice if notice is served Mr Hoffman, Mr McConville and Mr Hunkin sector, the Company may also provideprior to 8 April 2011 or on 12 months’ were charged to NRAM, plus the margin. notice at any time that it considersnotice if served thereafter. Mr McConville POLICY ON EXTERNAL NON‑EXECUTIVE appropriate so that the appointment maymay terminate the contract on giving DIRECTORSHIPS HELD BY EXECUTIVE terminate on the day that the Company is6 months notice. Mr McConville’s contract DIRECTORS returned to the private sector.may be terminated immediately by theCompany on payment of an amount equal Executive Directors were permitted to hold The fees paid to Non‑Executive Directorsto the salary (excluding other benefits) that one external non‑executive directorship during 2010 were as follows:he would have received during his notice unrelated to the Company’s business, Non‑Executive Director’speriod. The contract contains provisions provided that the time commitment was not Basic Fee £50,000under which the termination amount would material. Executive Directors were permittedbe paid in monthly instalments, with such to retain any fees arising from such a non‑ Additional Fee for Membershipinstalments reduced by an amount equal executive directorship. Mr Hoffman was of a Board Committee £5,000to the monthly remuneration derived permitted to continue with all non‑executive Additional Fee for Chairmanby Mr McConville from other activities directorships held by him at the date of his of the Risk Committee £20,000commencing during the notice period. appointment to the Board, and to retain the fees arising from these. Additional Fee for ChairmanMr Hoffman served under a service contract of other Board Committees £15,000dated 23 July 2008, terminable by either All Non‑Executive Directors referred toparty on 12 months’ notice given at any below served under letters of appointmenttime after 1 October 2009. Mr Hoffman’s terminable by either party serving three 9
DIRECTORS’ REMUNERATION REPORT (continued) months’ notice at any time. The Company REMUNERATION ARRANGEMENTS FOR maximum level of corporate and individual may also provide notice at any time such THE COMPANY IN 2011 performance is achieved. “On target” that the appointment may terminate on the performance would allow Executive COMPLIANCE day that the Company is returned to the Directors to earn up to 84%. Bonuses The Company intends to continue to private sector. will only become payable where the comply in all material respects with the Board has clear evidence that a sustained Set out below are details of the fee relevant regulations and the provisions improvement in the Company’s financial and arrangements of the Non‑Executive of the Code relating to Directors’ operational performance within a prudent Directors who served the Company remuneration throughout 2011. risk framework has been achieved over the during 2010: THE REMUNERATION COMMITTEE course of the year. (a) Mr Adams and Mr Coates were The Committee will continue to operate In addition to the short term bonus scheme, appointed as Non‑Executive Directors pursuant to its terms of reference the Company will operate a Long Term of the Company by letters of and will remain responsible for making Incentive Plan (LTIP) for senior employees appointment dated 26 November recommendations to the Board on that will deliver financial rewards if the 2009 expiring on 19 November the Company’s general policy relating Company achieves certain targets over 2011. Mr Adams and Mr Coates were to executive remuneration and for a three year performance period. As the entitled to the basic fee of £50,000 determining, on behalf of the Board, specific Company did not make LTIP awards in per annum. Mr Adams was entitled remuneration terms for the Chairman and 2010, it is the Company’s intention to to an additional fee of £20,000 per any Executive Directors employed in the make awards in 2011 covering 2010 and annum for chairing the Risk Committee future. It will also remain responsible for 2011. The 2010 award will vest in March and a further additional fee of oversight of the remuneration for Executive 2013 and the 2011 award in March 2014, £10,000 per annum for membership Committee members. or upon successful exit from Temporary of the Remuneration and Nominations Public Ownership, if earlier. Committee. Mr Coates was entitled REMUNERATION OF EXECUTIVE to an additional fee of £15,000 per DIRECTORS The Remuneration Committee will be annum for chairing the Audit Committee During 2011, the remuneration policies responsible for setting the performance and a further additional fee of £5,000 (including the policy on executive service conditions that will apply to awards made for membership of the Risk Committee. contracts) will remain closely aligned under this scheme which will include a to achievement of the objectives of the financial performance target and a quality of (b) Mr Pain, Ms Phibbs and Mr Fairey business plan. earnings assessment. The quality of earnings were appointed as Non‑Executive assessment will seek to establish the extent Directors of the Company under letters To reflect the additional responsibilities to which the financial performance of the of appointment dated 14 December undertaken by Mr McConville following the Company over the three year period was 2009, 11 December 2009 and departure of Mr Hoffman, Mr McConville’s attributable to the efforts of management, 14 December 2009, respectively. basic salary will be increased by 10% from as opposed to external market factors. The appointments were for a fixed term 1 January 2011 until either a new CEO is of 2 years commencing on 1 January appointed or the Company exits Temporary At the outset, the Remuneration Committee 2010 and expiring on 1 January 2012. Public Ownership. This additional allowance will set a “threshold”, “target” and “stretch” is non‑pensionable and will not be level of financial performance for the Mr Pain, Ms Phibbs and Mr Fairey were taken into account when calculating any Company, and the LTIP will operate for each entitled to a basic fee of £50,000 bonus payment that may become due to Executive Directors as follows:‑ per annum. Mr Pain and Ms Phibbs were entitled to an additional fee of £5,000 Mr McConville. • At the “threshold level” of performance, per committee per annum in respect A bonus scheme will operate in 2011 on the LTIP award will be 11.25%; of their membership of each of the similar terms to that which operated during • At the “target level” of performance, Audit and Risk Committees. Mr Fairey 2010. The Remuneration Committee the LTIP award will be 50% of basic was entitled to receive an additional considers that the terms of this bonus salary; and fee of £15,000 as Chairman of the scheme provide an appropriate link between Remuneration Committee and £5,000 • At the “stretch level” of performance, reward and performance whilst reflecting per annum in respect of his membership the LTIP award will be 75% of emerging best practice relating to bonus of the Audit Committee. basic salary. payments. As in 2010, this scheme will allow Executive Directors to earn up Between these levels of performance, to 120% of their annual salary if the vesting will occur on a “straight line”10
DIRECTORS’ REMUNERATION REPORT (continued)basis. Application of the “quality ofearnings” assessment by the RemunerationCommittee could cause the LTIP award toincrease or decrease by up to one third.It has also been agreed that 2010 LTIPawards for Executive Directors will beincreased by up to 50% to reflect theadditional responsibilities undertakenfollowing the departure of Mr Hoffman.REMUNERATION OF THE EXECUTIVECHAIRMAN AND NON‑EXECUTIVEDIRECTORSThere will be no change to the fees of theChairman and Non‑Executive Directors in2011.DIRECTORS’ INDIVIDUAL REMUNERATION IN 2010Details 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 £000ChairmanR A Sandler CBE 250 9 259Executive DirectorsG A Hoffman 591 237 90 4001 1,318R D Hunkin 275 41 13 329J McConville 256 38 185 22 153 516Non‑Executive DirectorsL P Adams 80 5 85J R Coates 70 6 76M E Fairey 70 5 75M Pain 60 3 63M Phibbs 60 7 67 1,712 316 185 160 415 2,7881 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 FaireyChairman of the Remuneration Committee8 March 2011 11
CORPORATE SOCIAL RESPONSIBILITY REPORT INTRODUCTION market deposits and foreign exchange, is To ensure we understand the levels of At Northern Rock plc we recognise covered by the Non Investment Products colleague engagement we regularly survey the importance of acting correctly as a Code (NIPs Code). This is a voluntary code, colleagues and the results are used to identify company and as such Corporate Social endorsed by the FSA, that lays down what any areas affecting colleague engagement and Responsibility (CSR) is a fundamental is generally considered to be good market determine required actions. element of the way we do business. practice. The Company does not deal with From the way we treat our customers and counterparties who are on sanctions lists HEALTH AND SAFETY colleagues, work with our suppliers and published by HM Treasury. In addition, all potential new counterparties, and their HEALTH & SAFETY POLICY engage with our community we believe in beneficial owners, are reviewed to ensure Our Health and Safety Policy is approved doing our utmost to behave responsibly. they are not classified as Politically Exposed by the Board and includes Executive CUSTOMERS Persons. We conduct periodic reviews to responsibility for leadership on Health and We have over one million customers and assess how our policies, procedures and Safety issues. our aim is to offer products and services in practices compare to FSA regulations and A comprehensive accident reporting and an open, honest and fair way. As our market best practice in the NIPs Code. investigation process is in place and we and customers’ environment changes we have worked closely with our insurers to are investing more time and resource in BETTER PAYMENT PRACTICE ensure that we continue to apply best understanding customer needs. This is The Company recognises the importance practice. In 2010 there were 2 RIDDOR helping us to design product features and of making supplier payments on time, reportable accidents. Occupational Health benefits that respond to these changes thereby ensuring that our suppliers do and Physiotherapy Services are provided especially in the way that customers want not encounter unnecessary cash flow to support colleagues as part of our to purchase from us. problems as a result of late payments attendance management programme. being made. The provisions of the relevant We regularly gauge customer opinion The work force is predominantly sedentary legislation have been fully communicated monitoring satisfaction and advocacy in nature. Workstation assessments are and implemented to ensure that we will ratings and also how our brand is perceived undertaken annually or where a colleague is not incur risks to reputation as a result by consumers in general. In addition, we relocated. During the year a total of 2,083 of non‑compliance. The only invoices not invest a considerable amount of time and workstation assessments were completed meeting the agreed payment date should be energy in ensuring that we Treat Customers and 56% of these resulted in minor those subject to query or dispute. Fairly day in, day out. This is demonstrated adjustments or additional equipment being in our vision and culture. provided. PENSION SCHEME The investments of the Company’s pension BUSINESS ETHICS AND HUMAN ENVIRONMENT schemes are held by the Trustees in pooled RIGHTS The key environmental impacts arising from funds. The Trustees expect the managers COMPETITIVE FRAMEWORK of pooled funds used for such purposes to our corporate operations are the use of Northern Rock plc is determined to ensure adhere to the UK Stewardship Code. energy and water, carbon dioxide emissions that it does not take unfair advantage of from corporate transport and waste. Where Government support during the period WORKPLACE practical we are committed to ensuring that of public ownership. The Company has environmental awareness and best practice agreed to and complied with a revised set COLLEAGUE ENGAGEMENT form an integral part of our decision of compensatory measures as part of the It is essential that the Company maintains making process. EC State aid process, approval for which a highly engaged workforce. It makes our Company a more attractive place to join, ENERGY was granted on 28 October 2009, and has work in and do business with. It is proven that The Company is committed to controlling actively managed its product range during those companies with a high engagement the environmental impact from its use of the year to maintain balances and pricing score have colleagues that display pride energy and this is demonstrated by its within the parameters of the measures. and loyalty to the Company which leads accreditation to the “Energy Efficiency TREASURY to enhanced performance and improved Scheme” which is operated by The Treasury dealing takes place in accordance customer satisfaction. The benefits can be Carbon Trust. This is an area where we seek with the rules and guidance in the Financial reduced absences and sickness, greater job continuous improvement and during 2010 Services Authority (FSA) Handbook. Any satisfaction, improved performance and “smart meters” have been fitted in all of our treasury dealing outside the detailed scope greater achievement. sites. This will improve our ability to manage of the FSA regulation, such as money consumption by providing on‑line data.12
CORPORATE SOCIAL RESPONSIBILITY REPORT (continued)WASTE Further information on The Northern Rock In addition, our community flagshipWe continue to operate successful recycling Foundation can be obtained from: programme focuses on financial inclusionfacilities throughout the Company. in the North East of England with the The Northern Rock FoundationWe recycle plastic and waxed cups, plastic objective of making a tangible improvement The Old Chapelbottles and cans, paper, cardboard, toner to the availability of affordable credit Woodbine Roadcartridges, surplus furniture and waste and savings products for financially Gosforthelectrical equipment. excluded people in the region. In 2010 Newcastle upon Tyne we have commenced programmes with NE3 1DDWATER South Tyneside Credit Union, the largestWe benchmark and target our water use Telephone: 0191 284 8412 community‑based credit union in theagainst the DEFRA corporate environmental Fax: 0191 284 8413 region, and The Five Lamps Organisation,reporting guidance for offices, which is Minicom: 0191 284 5411 a Community Development Finance0.05m3 per employee per working day. email: generaloffice@nr‑foundation.org.uk Institution. We provided our time, skills andDuring 2010 our equivalent figure was expertise to help them build their capability0.054m3 per employee (averaged over STAFF MATCHED GIVING and capacity.the year). The Staff Matched Giving Scheme, which is funded by the Northern Rock Foundation,TRAVEL supports individual colleagues who wish toIn 2010 the CO2 emissions per employee raise money for, or give money to, UK andarising from corporate travel (rail, air, Ireland registered charities or to exemptcars/vans for business purposes) was and excepted charities. The Foundation0.198 tonnes. A corporate travel plan Trustees have set an annual limit ofmanager was appointed this year with £500 per person per year.responsibility for mitigating our impacton the environment from corporate and COLLEAGUE CHOICE OF ANNUALpersonal travel with particular reference to CHARITYreducing single person car trips to work. The colleague choice of charity for 2010 was Samaritans in line with our focus onCOMMUNITY helping communities and individuals in financial difficulties. One in eight calls toTHE NORTHERN ROCK FOUNDATION Samaritans are concerned with financialThe Northern Rock Foundation, which difficulty. In 2010, a total of £71,000has enjoyed a long relationship with the was raised by colleagues for Samaritans,former Northern Rock business, supports including matching from The Northern Rockcommunity and charitable causes, Foundation.mainly in the North East of England and A further £427,000 was also given to aCumbria. The Foundation received a wide range of national and local charitiesdonation of £15 million from Northern and organisations as a result of fundraisingRock (Asset Management) plc in 2010 by colleagues over the year. This sum alsoand this represented the final payment includes matched giving from The Northernunder the terms of the original three‑year Rock Foundation.commitment made when the formerNorthern Rock business entered Temporary COMMUNITY VOLUNTEERINGPublic Ownership. The volunteering policy allows all NorthernNorthern Rock plc has entered into a new Rock plc colleagues two days per year paidtwo year rolling agreement to donate 1% leave to volunteer for community activity.of pre tax profits to the Foundation and we In 2010 the programme was refocusedlook forward to working together in support on communities in financial difficulties andof the many good causes it assists. 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 billion14
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