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Northern Rock plc, Registered Office: Northern Rock House, Gosforth, Newcastle upon Tyne NE3 4PLRegistered in England and Wales under Company Number 06952311 www.northernrock.co.uk

CONTENTSCompany Information 1

Directors’ Report 2

Independent Auditors’ Report to the Shareholder of Northern Rock plc 7

Consolidated Income Statement 8

Consolidated Statement of Comprehensive Income 9

Consolidated Balance Sheet 10

Company Balance Sheet 11

Consolidated Statement of Changes in Equity 12

Company Statement of Changes in Equity 13

Consolidated Cash Flow Statement 14

Company Cash Flow Statement 15

Notes to the Accounts 16

Presentation of Information

On 17 February 2008, the Chancellor of the Exchequer announced that the Government had decided to take Northern Rock into a period of temporary public ownership and on 22 February 2008 the Banking (Special Provisions) Bill received Royal Assent. HM Treasury made an order on 22 February 2008 which transferred all of the Ordinary, Preference and Foundation Shares in Northern Rock to the Treasury Solicitor as the Treasury’s nominee.

The legislation includes provisions such that Change of Control provisions in any of the Company’s contractual arrangements have not been triggered. Details of the impact of temporary public ownership are given throughout this Annual Report and Accounts as it affects the Company’s operations and financial disclosures.

As Northern Rock has previously published financial statements which have been prepared in accordance with EU endorsed International Financial Reporting Stand-ards (“IFRS”), IFRIC interpretations and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS, it continues to do so.

1

COMPANY INFORMATION

EXECUTIVE DIRECTORS J-A Gadhia

F Williamson

M Watson

NON-EXECUTIVE DIRECTORS Sir David Clementi (Chairman)

C Keogh

N McLuskie

COMPANY SECRETARY J Fitzpatrick

COMPANY NUMBER 06952311

REGISTERED OFFICE Northern Rock House

Gosforth

Newcastle Upon Tyne

NE3 4PL

AUDITORS PricewaterhouseCoopers LLP

89 Sandyford Road

Newcastle upon Tyne

NE1 8HW

2

DIRECTORS’ REPORT

The Directors present their report and the audited consolidated financial statements for the year ended 31 December 2011.

PRINCIPAL ACTIVITIES

The principal activities of Northern Rock plc (the “Group”, the “Company”) are to provide existing and new customers with mortgages and

retail savings products.

From 1 January 2012, following acquisition by Virgin Money Holdings (UK) Limited, Northern Rock plc became part of a larger banking group

with over four million customers.

The combined Virgin Money Group operates using the Virgin Money brand and provides, at scale, savings, mortgages, credit cards, insurance,

and investment products and has a nationwide network of branches. In time the product range will be expanded to offer a full range of

banking products (including current accounts), which will be available online, over the telephone, as well as through high street branches and

financial advisers.

The ambition of Virgin Money is to build a full-service retail bank that operates at scale and that provides meaningful competition in UK

retail banking.

All references to Group and Company apply to Northern Rock plc in 2011 and not the combined Virgin Money Group.

REVIEW OF BUSINESS AND FUTURE DEVELOPMENTS

2011 saw Northern Rock plc reach a landmark milestone in its development as it returned to private ownership through its sale to Virgin

Money Holdings (UK) Limited.

The sale was announced on 17 November 2011 with Virgin Money Holdings agreeing to acquire Northern Rock plc for £747m in cash on

completion plus up to circa an additional £280m over the next 5 years. The transaction completed on 1 Ja nuary 2012. As part of the sale

structure, Northern Rock plc acquired Virgin Money Limited from Virgin Money Holdings (UK) Limited. Details are given in note 3 6 to the

accounts.

As part of the acquisition of Northern Rock plc by Virgin Money Holdings (UK) Limited, the Directors of the Northern Rock plc business

changed on 1 January 2012. This report is based on the new Directors’ assessment of the performance of the Group in 2011.

The Group continued to make progress during 2011 and the Group’s financial performance remained on a positive trajectory. Against a

challenging economic background with low interest rates, the business remained loss-making. However, the level of the underlying loss was

significantly lower than in 2010, and the loss in the second half of 2011 was lower than in the first half of the year.

KEY PERFORMANCE INDICATORS

2011 2010

Gross mortgage lending (including retention business) £4.9bn £4.2bn

Loans and advances to customers £14.0bn £12.2bn

Retail deposit balances £16.6bn £16.7bn

Total assets £19.4bn £18.6bn

Administrative expenses and depreciation as a % of mean total assets ( see note 1) 0.81% 0.83%

Underlying profit/(loss) before tax (£11 0.9m) (£188.3m)

Mortgage accounts over 3 months in arrears 0. 28% 0.17%

Note 1: Administrative expenses excludes amounts recharged to Northern Rock (Asset Management) plc (“NRAM”) and Bradford & Bingley plc

(“B&B”).

FINANCIAL PERFORMANCE2011

£m

2010

£m

Statutory loss before tax (including discontinued operations) (18. 0) (223.5)

Exceptional restructuring costs 17.6 59.9

Gains on sale of available for sale securities (68.3) –

Gain on disposal of Irish deposit book (16.9) –

Hedge accounting volatility (21.6) (8.9)

Net impact of services provided to NRAM and B&B (3.7) (15.8)

Underlying loss before tax (11 0.9) (188.3)

3

DIRECTORS’ REPORT (continued)

On a statutory basis the Group reported a loss of £18. 0 million for 2011, compared with a loss of £223.5 million in 2010.

On an underlying basis (adjusting for one-off items in the table above and hedge accounting volatility, which management does not consider

to form part of underlying performance ), the full year loss was £11 0.9 million, compared with a loss of £188.3 million in 2010. Financial

performance improved significantly over the course of the year, driven by an increase in total income, along with a reduction in both recurring

and non-recurring expenses.

On an underlying basis, total income grew by £127 million in 2011, driven by an increase in net interest income reflecting growth in the

mortgage book, an improvement in funding margins, higher returns on liquid assets and a reduced cost of retail deposit guarantees as fixed

rate guaranteed balances continued to mature.

Other income benefited from one-off gains on sale of investment securities, principally due to the disposal of treasury assets agreed as part

of the sale of the Company. This was more than offset by lower fee income from NRAM following the reduction in services provided to NRAM

by Northern Rock plc.

Operating expenses in 2011 reduced by £13 2 million compared with 2010. A significant driver behind this was the operational separation of

Northern Rock plc from NRAM in November 2010. Prior to separation, the costs of running both companies were incurred by the Group, and

NRAM were recharged for services provided under a service level agreement. The net effect of this is adjusted for in the underlying loss for

the year. The completion of operational separation from NRAM enabled a focus on process improvement to reduce complexity and lower cost.

LENDING AND CREDIT QUALITY

The Group continued to support lending levels in the mortgage market, with gross mortgage lending (including retention business) of £4.9

billion in 2011, 17% higher than in 2010. Net residential lending was £1.8 billion, which resulted in mortgage balances increasing to £14.0 billion.

All mortgage lending is carefully managed with affordability for customers as the key consideration to manage risk. The quality of new lending

remained high with an average loan-to-value ratio (LTV) of new lending of 70% in 2011, compared with the average LTV for the book of 62%.

The level of mortgage arrears remained very low, reflecting the high quality of the Group’s mortgage balances. Arrears gently increased during

the year, reflecting the maturing nature of the book as well as the difficult economic environment. Mortgage accounts over three months in

arrears were 0. 28% at 31 December 2011 compared with the Council of Mortgage Lenders industry average of 1.98%.

FUNDING

Northern Rock plc is predominantly funded by retail deposits, which represented 93% of total funding at 31 December 2011. Retail deposits

were 18% higher than mortgage balances at 31 December 2011, giving a loans to deposits ratio of 84%.

During 2011, the Group agreed the sale of its retail funding operations in Ireland to Irish Life & Permanent plc. The sale completed on

3 January 2012, which resulted in £396 million of balances being transferred. The gain on disposal was £ 16.9 million.

Excluding Irish deposits, retail balances were £16.2 billion at 31 December 2011, compared with £16.7 billion at 31 December 2010.

The Group completed its first public securitisation issue in April 2011, issuing £595 million of A1 notes which diversified the funding base.

The transaction was oversubscribed, demonstrating the confidence investors have in the Group’s high quality mortgage book. The level of

demand resulted in the initial issue being increased in size, and a further issue of A2 notes being completed in June 2011, which raised a

further £542 million.

CAPITAL AND LIQUIDITY

Northern Rock plc is a safe, stable business for customers. The Group is strongly capitalised and well positioned to meet Basel III regulatory

requirements, with a Tier 1 and Total Capital ratio of 34.6% at 31 December 2011.

The Group held liquid assets of £5.0 billion at 31 December 2011, which represented 25.6% of total assets. Liquid assets comprise cash and

balances with central banks, loans and advances to banks and investment securities.

COMMUNITY

Northern Rock plc continued to support its community programme over 2011 in which employees are encouraged to use their skills and

abilities to support good causes. Employees regularly contributed their time and money to voluntary initiatives, community fundraising

activities and in participating in a wide range of community programmes.

The Company also pledged to continue supporting the Northern Rock Foundation and its work in the North East and Cumbria. From 2011,

the Board agreed to provide future funding to the Foundation based on the level of profitability of Northern Rock plc, which would equate to

1% of the profit before tax of the Company. Upon sale of the Company, Virgin Money pledged to extend that commitment, in respect of the

Northern Rock plc business, until the end of 2013 and to work with the Foundation to understand the best way to work together after that.

4


Future Developments

Following the completion of the sale to Virgin Money, one of the primary areas of focus for 2012 is the successful integration of the Northern

Rock plc and Virgin Money businesses. The combined business will operate under the Virgin Money brand, with the rebranding programme

taking place during the course of 2012.

Bringing together Northern Rock plc and Virgin Money has created a bank with over four million customers that provides, at scale, savings,

mortgages, current accounts, credit cards, insurance and investment products and that has a nationwide network of branches. In time the

product range will be expanded to offer a full range of banking products (including current accounts), which will be available online , over the

phone, as well as through high street branches and financial advisers.

The ambition of Virgin Money is to build a full-service retail bank that operates at scale and provides meaningful competition in UK retail

banking. To deliver this competition, Virgin Money will differentiate itself through its approach to doing business that it describes as “making

everyone better off”. The business articulates this as focusing on the 5 C’s: Customers, Communities, Corporate partners, Colleagues and

Company. To achieve this, the Company is focused on offering good value products and services to customers, being a good partner in its

relationships with other businesses, making a meaningful difference in the communities it serves, providing staff with a great place to work

and making a fair return for its shareholders. This philosophy is already deeply embedded in the culture of the business and measured

through a detailed scorecard.

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: transition to Virgin Money following completion of the sale of Northern Rock plc, establishment of a sustainable business

model for the new Group, double dip recession and the completion of separation of Northern Rock plc from Northern Rock (Asset

Management) plc.

A review of the management of the principal risks and uncertainties is set out in note 3 1 to the Accounts.

DIVIDENDS

The Directors do not propose the payment of any dividends on the Ordinary shares in respect of the year ended 31 December 2011.

PROPERTY, PLANT AND EQUIPMENT

Land and buildings, which are included in the balance sheet at cost less accumulated depreciation and impairment losses, amounted to

£13.4 million at 31 December 2011. 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 2011 was not significantly different to the carrying value on the balance sheet.

Details of changes to property, plant and equipment are included in note 2 3 to the Accounts.

5


DIRECTORS

The current composition of the Board of Directors together with details of appointments and retirements up to the date of this report is

as follows :

K Morgan Appointed 29 June 2011

Resigned 1 January 2012

R Sandler Resigned 1 January 2012

L Adams Resigned 1 January 2012

J Coates Resigned 1 January 2012

M Fairey Resigned 1 January 2012

J McConville Resigned 1 January 2012

M Pain Resigned 1 January 2012

M Phibbs Resigned 1 January 2012

Sir David Clementi Appointed 1 January 2012

J-A Gadhia Appointed 1 January 2012

M Watson Appointed 1 January 2012

F Williamson Appointed 1 January 2012

C Keogh Appointed 1 January 2012

N Mc Luskie Appointed 1 January 2012

Mr Sandler, Mr Adams, Mr Coates, Mr Morgan, Mr McConville, Mr Pain, Mr Fairey and Ms Phibbs were Directors of the Company for the year

ended 31 December 2011.

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.

The Company’s Articles of Association provide an indemnity to Directors against certain liabilities incurred as a result of their office. The

indemnities extend to defending any proceedings in which judgment is given in the Directors’ favour or in which they are acquitted or in any

proceedings in which relief is granted by a court from liability for negligence, default, breach of duty or breach of trust in relation to the

affairs of the Company.

The Company provides 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 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 2 9 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 the Company 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;

6

• 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.

BRANCH OFFICES

As at 31 December 2011 the Company’s branch network included an office in Ireland and a subsidiary in Guernsey, Northern Rock (Guernsey)

Limited. The office in Ireland, together with all associated assets and liabilities was transferred to Irish Life & Permanent plc on 3 January

2012 . Northern Rock (Guernsey) Limited has been under the control of the liquidator since 30 September 2010. Northern Rock (Guernsey)

Limited has reserves of £5.0 million 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 2011 was 13 days.

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 parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as

adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that

they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In

preparing these financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently

• make judgements and accounting estimates that are reasonable and prudent

• state whether applicable 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; the work carried out by the auditors

does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have

occurred to the financial statements since they were initially presented on the website.

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 not aware. The Directors have taken the steps they need to have taken as Directors to make themselves

aware of any relevant audit information and to establish that the auditors are also aware of that information.

By order of the Board

Jayne-Anne Gadhia,

Chief Exec utive Officer

2 2 March 2012


7

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 2011 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 6, 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.

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 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.

In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited

financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

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 2011

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 and, as regards the group

financial statements, Article 4 of the lAS Regulation.

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

2 2 March 2012

8

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2011

Note 2011 2010

£m £m

Interest and similar income 4 501.4 406.8

Interest and similar expense 5 (417.1) (447.8)

Net interest income/(expense) 84.3 (41.0)

Fee and commission income 6 36.5 174.6

Fee and commission expense (25.3) (25.1)

Other operating income 0.4 0.8

Gains on sale of property, plant and equipment 4.4 0.1

Gains on sale of available for sale securities 20 68.3 –

Net trading income/(expense) 11 4.7 (4.4)

89.0 146.0

Total income 173.3 105.0

Administrative expenses 7 (163.3) (250.7)

Depreciation and amortisation (13.4) (16.0)

Exceptional costs 7 (17.6) (59.9)

Operating expenses (194.3) (326.6)

Impairment losses on loans and advances 10 (4.9) (1.9)

Loss before taxation (25.9) (223.5)

Taxation 12 (0.6) –

Loss for the year from continuing operations (26.5) (223.5)

Loss for the year from discontinued operations 36 (9.0) –

Gain on disposal of discontinued operations (net of tax of £6.1m) 36 16.9 –

Loss for the year attributable to owners (18.6) (223.5)

The notes on pages 1 6 to 5 4 form an integral part of these financial statements.

9

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFor the year ended 31 December 2011

Note 2011 2010

£m £m

Loss for the year attributable to owners (18.6) (223.5)

Other comprehensive income

Net movement in available for sale reserve 30 (16.5) 9.3

Net movement in cash flow hedge reserve 30 (0.5) 1.4

Actuarial gains and losses 9 (1.6) (0.6)

(18.6) 10.1

Total comprehensive income for the year attributable to owners (37.2) (213.4)

The notes on pages 1 6 to 5 4 form an integral part of these financial statements.

10

CONSOLIDATED BALANCE SHEETAt 31 December 20 11

Note 2011 2010

£m £m

Assets

Cash and balances with central banks 15 2,752.1 4,646.0

Derivative financial instruments 16 181.0 149.0

Loans and advances to banks 17 859.3 585.2

Loans and advances to customers 18 13,963.1 12,197.5

Fair value adjustments of portfolio hedging 18 195.9 176.9

Investment securities 20 1,361.9 661.0

Intangible assets 22 4.6 11.1

Property, plant and equipment 23 27.9 34.7

Retirement benefit asset 9 1.5 3.1

Other assets 34.6 83.9

Prepayments and accrued income 12.5 13.4

Total assets 19,394.4 18,561.8

Liabilities

Deposits by banks 25 98.2 0.7

Customer accounts in continuing operations 2 6 16,287.2 16,903.2

Customer accounts held for sale 26 396.0 –


Debt securities in issue 19 943.7 –

Other liabilities 62.4 43.4

Accruals and deferred income 27 156.5 164.6

Current income tax liability 6.5 –

Provisions for liabilities and charges 28 7.8 7.4

18,244.1 17,374.3

Equity

Share capital 29 1,400.0 1,400.0

Other reserves 30 (22.5) (5.5)

Retained earnings (227.2) (207.0)

Total equity 1,150.3 1,187.5

Total equity and liabilities 19,394.4 18,561.8

The notes on pages 16 to 54 form an integral part of these financial statements.

Approved by the Board on 22 March 2012 and signed on its behalf by:

Sir David Clementi J-A Gadhia F Williamson

Chairman Chief Executive Officer Chief Financial Officer

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

11

COMPANY BALANCE SHEETAt 31 December 2011

Note 2011 2010

£m £m

Assets

Cash and balances with central banks 15 2,752.1 4,646.0


Loans and advances to banks 17 689.6 579.7

Loans and advances to customers 18 14,015.8 12,197.5

Fair value adjustments of portfolio hedging 18 195.9 176.9

Investment securities 20 1,361.9 661.0

Intangible assets 22 4.6 11.1

Property, plant and equipment 23 27.9 34.7

Retirement benefit asset 9 1.5 3.1

Other assets 37.3 83.4

Prepayments and accrued income 12.3 13.4

Total assets 19,279.9 18,555.8

Liabilities

Deposits by banks 25 98.2 0.7

Customer accounts in continuing operations 26 17,139.3 16,903.2

Customer accounts held for sale 26 396.0 –


Other liabilities 62.4 42.6

Accruals and deferred income 27 152.0 164.6

Current income tax liability 6.5 –

Provisions for liabilities and charges 28 7.8 7.4

18,135.2 17,373.5

Equity

Share capital 29 1,400.0 1,400.0

Other reserves 30 (22.5) (5.5)

Retained earnings (232.8) (212.2)

Total equity 1,144.7 1,182.3

Total equity and liabilities 19,279.9 18,555.8

The notes on pages 16 to 54 form an integral part of these financial statements.

Approved by the Board on 22 March 2012 and signed on its behalf by:

Sir David Clementi J-A Gadhia F Williamson

Chairman Chief Executive Officer Chief Financial Officer

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

12

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2011

Share Other Retained Total

Capital reserves earnings equity

Note £m £m £m £m

Balance at 1 January 2011 1,400.0 (5.5) (207.0) 1,187.5

Loss for the year – – (18.6) (18.6)


Net movement in available for sale reserve 30 – (16.5) – (16.5)

Net movement in cash flow hedge reserve 30 – (0.5) – (0.5)

Actuarial gains and losses 9 – – (1.6) (1.6)

Total other comprehensive income – (17.0) (1.6) (18.6)

Balance at 31 December 2011 1,400.0 (22.5) (227.2) 1,150.3

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2010




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)


Net movement in available for sale reserve 30 – 9.3 – 9.3

Net movement in cash flow hedge reserve 30 – 1.4 – 1.4


Total other comprehensive income – 10.7 (0.6) 10.1


13

COMPANY STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2011




Balance at 1 January 2011 1,400.0 (5.5) (212.2) 1,182.3

Loss for the year – – (19.0) (19.0)


Net movement in available for sale reserve 30 – (16.5) – (16.5)

Net movement in cash flow hedge reserve 30 – (0.5) – (0.5)


Total other comprehensive income – (17.0) (1.6) (18.6)


COMPANY STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2010




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)


Net movement in available for sale reserve 30 – 9.3 – 9.3

Net movement in cash flow hedge reserve 30 – 1.4 – 1.4


Total other comprehensive income – 10.7 (0.6) 10.1


14

CONSOLIDATED CASH FLOW STATEMENTFor the year ended 31 December 2011

Note 2011 2010

£m £m

Net cash (outflow)/inflow from operating activities


Adjusted for:

Depreciation and amortisation 13.4 17.2

Gains on sale of property, plant and equipment (4.4) (1.3)

Gains on available for sale securities (68.3) –

Impairment losses on loans and advances 10 4.9 1.9

Income taxes paid (0.3) –

Loss for the year from discontinued operations (9.0) –

Gain on disposal of discontinued operations (net of tax of £6.1m) 16.9 –

Fair value adjustments on financial instruments 4.2 (101.4)

Other non cash movements (50.7) (19.3)

Net cash outflow from operating losses before changes in operating assets and liabilities (119.2) (326.4)

Changes in operating assets and liabilities

Net decrease/(increase) in deposits held for regulatory or monetary control purposes 14.3 (30.1)

Net increase in loans and advances (1,753.4) (12,175.2)

Net increase in derivative financial instruments receivable (32.0) (149.0)

Net decrease/(increase) in other assets 49.3 (83.8)

Net decrease/(increase) in prepayments and accrued income 0.9 (13.4)

Net increase in debt securities in issue 943.7 –

Net decrease in loans from HM Treasury – (1,400.0)

Net increase in deposits from other banks 97.5 0.7

Net (decrease)/increase in amounts due to customers (243.2) 16,827.7

Net increase in derivative financial instruments payable 30.8 255.0

Net increase in other liabilities 19.0 43.4

Net (decrease)/increase in accruals and deferred income (8.1) 164.6

Net cash (outflow)/inflow from operating activities (1,000.4) 3,113.5

Net cash outflow from investing activities

Net investment in intangible assets (1.6) (23.8)

Net investment in property, plant and equipment 5.9 (37.9)

Purchase of investment securities (including transfer from Northern Rock (Asset Management) plc) (9,658.8) (1,455.4)

Proceeds from sale and redemption of investment securities 9,109.4 794.8

(545.1) (722.3)

Net cash inflow from financing activities

Issuance of ordinary shares – 1,399.9

– 1,399.9

Net (decrease)/increase in cash and cash equivalents (1,545.5) 3,791.1

Opening cash and cash equivalents 5,191.1 1,400.0

Closing cash and cash equivalents 35 3,645.6 5,191.1

15

COMPANY CASH FLOW STATEMENTFor the year ended 31 December 2011

Note 2011 2010

£m £m

Net cash (outflow)/inflow from operating activities


Adjusted for:

Depreciation and amortisation 13.4 17.2

Gains on sale of property, plant and equipment (4.4) (1.3)

Gains on available for sale securities (68.3) –

Impairment losses on loans and advances 10 4.9 1.9

Income taxes paid (0.3) –

Loss for the year from discontinued operations (9.0) –

Gain on disposal of discontinued operations (net of tax of £6.1m) 16.9 –

Fair value adjustments on financial instruments 4.2 (101.4)

Other non cash movements (50.8) (36.4)

Net cash outflow from operating losses before changes in operating assets and liabilities (119.6) (331.6)

Changes in operating assets and liabilities

Net decrease/(increase) in deposits held for regulatory or monetary control purposes 14.3 (30.1)

Net increase in loans and advances (1,806.1) (12,175.2)

Net increase in derivative financial instruments receivable (32.0) (149.0)

Net decrease/(increase) in other assets 46.1 (83.3)

Net decrease/(increase) in prepayments and accrued income 1.1 (13.4)

Net decrease in loans from HM Treasury – (1,400.0)

Net increase in deposits from other banks 97.5 0.7

Net increase in amounts due to customers 608.9 16,827.7

Net increase in derivative financial instruments payable 18.0 255.0

Net increase in other liabilities 19.8 42.6

Net increase in accruals and deferred income (12.6) 164.6

Net cash (outflow)/inflow from operating activities (1,164.6) 3,108.0

Net cash outflow from investing activities

Net investment in intangible assets (1.6) (23.8)

Net investment in property, plant and equipment 5.9 (37.9)

Purchase of investment securities (including transfer from Northern Rock (Asset Management) plc) (9,658.8) (1,455.4)

Proceeds from sale and redemption of investment securities 9,109.4 794.8

(545.1) (722.3)

Net cash inflow from financing activities

Issuance of ordinary shares – 1,399.9

– 1,399.9

Net (decrease)/increase in cash and cash equivalents (1,709.7) 3,785.6

Opening cash and cash equivalents 5,185.6 1,400.0

Closing cash and cash equivalents 35 3,475.9 5,185.6

16

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.

On 1 January 2010 Northern Rock plc became a savings and mortgage bank under the terms of the Statutory Instrument 2009/3326 (“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. The Company commenced trading on the same date.

On 1 January 2012, the Group was acquired by Virgin Money Holdings (UK) Limited. On 2 January 2012, Northern Rock plc acquired Virgin Money Limited. See note 3 6 for further details.

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 IFRS 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 3).

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 to 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 or 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. 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. Subsequent measurement is at fair value, with changes in fair value being recognised in other comprehensive income 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 other comprehensive income are removed from other comprehensive income 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 the current or prior year.

17

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 during either the current or prior year.

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 other comprehensive income, 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 agreementsSecurities 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 on or 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.

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:

18



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 other comprehensive income which are recycled from other comprehensive income 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, has expired or is transferred to a third party.

k) Securitisation transactionsCertain Group companies have issued debt securities in order to finance specific loans and advances to customers. Both the debt securities in issue and the loans and advances to customers remain on the Group balance sheet within the appropriate balance sheet headings unless:

i) a fully proportional share of all or of specifically identified cash flows have been transferred to the holders of the debt securities, in which case that proportion of the assets are derecognised;

ii) substantially all the risks and rewards associated with the assets have been transferred, in which case the assets are fully derecognised; or

iii) a significant proportion of the risks and rewards have been transferred, in which case the assets are recognised only to the extent of the Group’s continuing involvement.

The Group has also 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) Debt and equity securities in issueIssued securities are classified as liabilities where the contractual arrangements result in the Group having an obligation to deliver either cash or another financial asset to the security holder, or to exchange financial instruments under conditions that are potentially unfavourable to the Group. Issued securities are classified as equity where they meet the definition of equity and confer a residual interest in the Group’s assets on the holder of the securities.

Financial liabilities are carried at amortised cost using the effective interest rate (see “interest income and expense”). Equity instruments are initially recognised at net proceeds, after deducting transaction costs and any related income tax. Appropriations to holders of equity securities are deducted from equity, net of any related income tax, as they become irrevocably due to the holders of the securities.

m) Foreign currency translationThe 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.

19



n) 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.

o) 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.

p) 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.

q) 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.

The defined benefit section closed to future accrual with effect 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 transferred out of the Scheme, but with the option to join the Northern Rock (2011) Pension Scheme which has a defined contribution section only.

The Scheme was valued at 31 December each year by qualified independent actuaries for the year end accounts. For the purpose of these annual updates, Scheme assets were included at their fair value and Scheme liabilities were measured on an actuarial basis using the projected unit credit method. Liabilities in the defined benefit section of the Scheme were discounted using rates equivalent to the market yields at the balance sheet date on high quality corporate bonds that were denominated in the currency in which the benefits will be paid, and that had terms to maturity approximating to the terms of the related pension liability. The resulting net surplus or deficit was included in the Group’s balance sheet. Surpluses were only recognised to the extent that they were recoverable through reduced contributions in the future or through refunds from the Scheme.

The Group’s income statement included 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 were recognised immediately through other comprehensive income.

Past service costs were recognised immediately in the income statement, unless the changes to the Scheme were conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs were 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.

r) Property, plant and equipmentProperty, 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.

20



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.

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

s) Impairment of property, plant and equipment and intangible assetsProperty, 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 fair value less costs to sell and their value in use. Fair value less costs to sell 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.

t) LeasesIf 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 over the lease term 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.

u) ProvisionsProvisions 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.

v) Share capitali) 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 shareholder or paid.

w) Discontinued operationsA discontinued operation is a cash-generating unit that has either been disposed of or is classified as held for sale and:

i) represents a separate major line of business or geographical area of operations;

ii) is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or

iii) is a subsidiary acquired exlusively with a view to resale.

The results of discontinued operations are disclosed on the face of the income statement by way of the profit or loss from discontinued operations in the period together with either the gain or loss on disposal of the discontinued operation or the gain or loss recognised on measurement to fair value less costs directly attributable to the sale.

x) Implementation of new standards and amendments to published standards and interpretations effective during 2011The following new standards, amendments to standards or interpretations are also mandatory for the first time for financial years during 2011 and have been endorsed for adoption by the EU, but have no material financial impact on the Group. These are applicable from 1 January 2011 unless otherwise stated:

• Amendment to IAS 24, Related party disclosures

• 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. This is effective for annual periods beginning on or after 1 July 2010

• Annual improvements 2010

• IFRIC 19, Extinguishing financial liabilities with equity instruments.

21



y) Standards, interpretations and amendments to published standards that are not yet effective and the early adoption of standardsThe Group has not early adopted any standards or interpretations during 2011.

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 2011:

• Amendment to IAS 32 Financial Instruments: Presentation on Offsetting financial assets and financial liabilities

• Amendment to IFRS 7, Financial Instruments: Disclosures on derecognition.

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 2011 and have not been endorsed by the EU:

• IFRS 9, Financial instruments

• IFRS 10, Consolidated financial statements

• IFRS 11, Joint arrangements

• IFRS 12, Disclosures of interests in other entities

• IFRS 13, Fair value measurement

• IAS 27, Separate financial statements

• IAS 28, Investments in associates and joint ventures

• Amendment to IAS 1, Presentation of financial statements, on other comprehensive income (OCI)

• Amendment to IAS 12, ‘Income taxes’ on deferred tax

• Amendments to IFRS 1, ‘First time adoption’ on hyperinflation and fixed dates

• IAS 19, (revised 2011), Employee benefits.

3. 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 £0.6m higher (2010 £0.2m) or £0.6m lower (2010 £0.2m) respectively.

b) Fair value calculationsFair 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 £4.7m (2010 £1.5m).

c) Average life of secured lendingIAS 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 £5.0m (2010 £3.9m) and £5.1m (2010 £3.6m) respectively.

d) Unrecognised deferred tax assetsSignificant 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 unprovided deductible temporary differences and unused tax losses available but not recognised as deferred tax assets at 31 December 2011 was £ 307.1m (2010 £259.1m) in both the Group and Company.

22


4. Interest and similar income

2011 2010 £m £m

On secured advances 450.0 365.7On other lending – 0.9On investment securities and deposits 51.4 40.2

501.4 406.8

Interest accrued on individually impaired assets was £0.3m (2010 less than £0.1m).

Interest and similar income from discontinued operations was £6.2m.

5. Interest and similar expense

2011 2010 £m £m

On retail customer accounts 392.4 414.0Retail and wholesale guarantee costs 4.0 33.2On debt securities in issue 17.5 –Other 3.2 0.6

417.1 447.8

Interest and similar expense from discontinued operations was £13.6m.

6. Fee and commission income

2011 2010 £m £m

Service level agreements with Northern Rock (Asset Management) plc and Bradford & Bingley plc 28.7 168.3Other fee and commission income 7.8 6.3

36.5 174.6

7. Administrative expenses

2011 2010 £m £m

Administrative expensesWages and salaries 76.7 121.7Social security costs 8.5 12.2Other pension costs 6.3 10.9

Total staff costs 91.5 144.8Other administrative expenses 71.8 105.9

163.3 250.7

Other administrative expenses include: Hire of equipment 4.0 3.5Property rentals 11.2 11.7Remuneration of auditors (see below) 0.4 0.6

Administrative expenses from discontinued operations were £1.6m.

In 2010 administrative expenses of £102.9m were recharged to Northern Rock (Asset Management) plc via the service level agreement. On 1 November 2010, the basis for the recharge of administrative expenses was changed. Following full separation of Northern Rock plc from Northern Rock (Asset Management) plc, the recharge is no longer based on a markup of costs incurred and instead comprises a flat monthly fee for IT and ancillary services. This is recognised in fee and commission income.

Exceptional costs

2011 2010 £m £m

Redundancy costs 12.6 25.4Professional fees recharged by the Tripartite Authorities – 1.8Strategic project development 5.0 32.7

17.6 59.9

In 2010 exceptional costs of £49.6m were recharged to Northern Rock (Asset Management) plc and Bradford & Bingley plc via the service level agreement.

23


7. Administrative expenses (continued)

The monthly average number of persons (including Directors) employed by the Group and Company was as follows:

2011 2010 Full time 1,934 3,371Part time 483 939

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:

2011 2010 £m £m

Administrative expensesFees payable to Company auditor for the audit of parent Company and consolidated financial statements 0.3 0.4Fees payable to Company auditor and its associates for other services– Other services pursuant to legislation (including review of half year Interim Statement) 0.1 0.1– Other services (see note i) – 0.1

0.4 0.6

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

8. Directors’ emoluments

In 2011 aggregate directors’ emoluments including taxable benefits were £1,376k (2010 £2,472k) plus personal pension arrangements of £53k (2010 £316k) and amounts receivable under long term incentive schemes of £273k (2010 £nil).

The remuneration of the highest paid director was £696k (2010 £1,081k) plus personal pension arrangements of £53k (2010 £237k) and amounts receivable under long term incentive schemes of £273k (2010 £nil).

In addition to the above, £372k is receivable by a director as compensation for loss of office (2010 £nil) following the acquisition by Virgin Money Holdings (UK) Limited.

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 close to future accrual of pension benefits in January 2011. This resulted in a curtailment gain of £9.8m. During the course of 2011, the liabilities of the Scheme have been settled as the benefits of all members were transferred to alternative arrangements. These amounts have been settled through the assets held within the Scheme during the year. The remaining defined benefit obligation at 31 December 2011 solely represents an accrual of administration costs. Accordingly no actuarial assumptions have been set in respect of the measurement of liabilities. The remaining defined benefit asset at 31 December 2011 is invested in cash and is expected to be repaid to the Company in 2012.

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 IAS 19.

Summary of assumptions

2011 2010 % %

Price inflation N/A 3.75Rate of increase in salaries N/A N/ARate of increase for pre 6 April 2006 pensions in payment (in excess of any Guaranteed Minimum Pension (GMP) element) N/A 3.80Rate of increase for post 6 April 2006 pensions in payment N/A 3.55Rate of increase for deferred pensions N/A 3.75Discount rate N/A 5.35Expected rate of return on assets 0.25 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. 2011 2010 Pensioner Non-pensioner Pensioner Non-pensionerMale N/A N/A 27.9 29.6Female N/A N/A 30.5 32.1

24


9. Retirement benefit obligations (continued)

Categories of assets held

2011 2010 % %

Debt securities – 94Cash 100 6

Total 100 100

Funded status

2011 2010 £m £m

Present value of defined benefit obligation (0.6) (12.3)Assets at fair value 2.1 15.4

Defined benefit asset 1.5 3.1

Disclosed pension expense for year:

a) Components of defined benefit pension expense

2011 2010 £m £m

Current service cost – 6.2Interest cost 0.4 1.1Expected return on assets (0.4) (0.4)Past service cost – 9.0Curtailment 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

2011 2010 £m £m

Actuarial loss recognised in statement of comprehensive income 1.6 0.6Cumulative actuarial loss recognised at 1 January 0.6 –

Cumulative actuarial loss recognised at 31 December 2.2 0.6

Movements in present value of defined benefit obligation during the year

2011 2010 £m £m

Present value of defined benefit obligation at 1 January 12.3 –Employer service cost – 6.2Interest cost 0.4 1.1Plan participants’ contributions – 1.2Actuarial loss 3.2 0.8Administrative expenses paid (1.0) –Past service cost – 9.0Curtailment gain – (9.8)Settlements (14.3) –Other adjustments ( transfer of money purchase guarantee reserve) – 3.8

Present value of defined benefit obligation at 31 December 0.6 12.3

25


9. Retirement benefit obligations (continued)

Movements in fair value of defined benefit assets during the year

2011 2010 £m £m

Fair value of assets at 1 January 15.4 –Expected return on assets 0.4 0.4Actuarial gain 1.6 0.2Employer contributions (including transfer of assets from the Northern Rock pension scheme) – 9.8Plan participants’ contributions – 1.2Administrative expenses paid (1.0) –Settlements (14.3) –Other adjustments (transfer of money purchase guarantee reserve) – 3.8

Fair value of assets at 31 December 2.1 15.4

The actual return on plan assets in 2011 was £2.0m (2010 £0.6m).

Experience gains and losses

2011 2010 £m £m

Defined benefit obligation 0.6 12.3Fair value of assets 2.1 15.4Surplus 1.5 3.1Actuarial loss on defined benefit obligation (3.2) (0.8)Experience gain on assets 1.6 0.2

Estimated total contributions for the year ending 31 December 2012 are £nil.

Pension costs for the defined contribution section of the Scheme were £6.1m (2010 £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 £m2011Group and Company At 1 January 2011 2.1 0.1 0.2 2.4Increase/(decrease) in allowance during the year net of recoveries 4.8 0.2 (0.1) 4.9Amounts written off during the year (0.7) – – (0.7)

At 31 December 2011 6.2 0.3 0.1 6.6

On On advances advances secured on secured on On residential residential buy unsecured property to let property loans Total £m £m £m £m2010

Group and Company At 1 January 2010 – – – – Transferred from Northern Rock (Asset Management) plc 0.4 – 0.2 0.6Increase in allowance during the year net of recoveries 1.7 0.1 0.1 1.9Amounts written off during the year – – (0.1) (0.1)

At 31 December 2010 2.1 0.1 0.2 2.4

26


1 1. Net trading income/(expense)

2011 2010 £m £m

Fair value movements of future cash flows, excluding accruals, on derivatives not in hedge accounting relationships (7.3) (4.6)Translation gains on underlying instruments 12.0 0.2

4.7 (4.4)

1 2. Taxation

The income tax expense for the year comprises:

2011 2010 £m £m

Current tax on profits for the year (0.6) –

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 26.5% (2010 28%) as follows:

2011 2010 £m £m

Loss before taxation (25. 9) (223.5)

Tax calculated at rate of 26.5% (2010 28%) 6. 9 62.6Deferred income tax asset arising not recognised ( 8.1) (64.6)Income not subject to tax 0.1 –Expenses not deductible for tax purposes – (4.3)Adjustment in respect of assets transferred from Northern Rock (Asset Management) plc – 6.3Permanent differences arising on asset disposals 0.5 –

Taxation (0.6) –

A number of changes to the UK corporation tax system were announced in the March 2011 budget statement. Further reductions to the main rate are proposed to reduce the rate by 1% per annum (3% in total) to 23% by 1 April 2014. These further changes had not been substantively enacted at the balance sheet date and, therefore, are not included in these financial statements.

1 3. Loss attributable to owners

Of the loss attributable to owners, £19.0m (2010 £211.6m) 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 and statement of comprehensive income have not been presented separately.

27


1 4. Analysis of financial assets and financial liabilities by measurement basis

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 hedges hedges Total £m £m £m £m £m £m £m £m2011Financial assets Cash and balances with central banks – 2,752.1 – – – – – 2,752.1Derivative financial instruments – – – – 47.9 129.0 4.1 181.0Loans and advances to banks – 859.3 – – – – – 859.3Loans and advances to customers – 14,159.0 – – – – – 14,159.0Investment securities – – 1,235.4 126.5 – – – 1,361.9Accrued income – 1.7 – – – – – 1.7

– 17,772.1 1,235.4 126.5 47.9 129.0 4.1 19,315.0Non financial assets 79.4

19,394.4

Financial liabilities Deposits by banks 98.2 – – – – – – 98.2Customer accounts 16,683.2 – – – – – – 16,683.2Debt securities in issue 943.7 – – – – – – 943.7Derivative financial instruments – – – – 38.5 245.5 1.8 285.8Accruals 126.0 – – – – – – 126.0

17,851.1 – – – 38.5 245.5 1.8 18,136.9Non financial liabilities 107.2

Total liabilities 18,244.1Equity 1,150.3

19,394.4

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 hedges hedges Total £m £m £m £m £m £m £m £m2010Financial assets Cash and balances with central banks – 4,646.0 – – – – – 4,646.0Derivative financial instruments – – – – 4.7 141.1 3.2 149.0Loans and advances to banks – 585.2 – – – – – 585.2Loans and advances to customers – 12,374.4 – – – – – 12,374.4Investment securities – – 363.2 297.8 – – – 661.0Accrued income – 1.9 – – – – – 1.9

– 17,607.5 363.2 297.8 4.7 141.1 3.2 18,417.5Non financial assets 144.3

18,561.8

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

17,024.3 – – – 14.2 240.8 – 17,279.3Non financial liabilities 95.0

Total liabilities 17,374.3Equity 1,187.5

18,561.8

28


1 5. Cash and balances with central banks

Group and Company 2011 2010 £m £m

Cash in hand 7.9 8.1Other balances with central banks 2,728.4 4,607.8

Included in cash and cash equivalents 2,736.3 4,615.9Mandatory reserve deposits with central banks 15.8 30.1

2,752.1 4,646.0

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

1 6. Derivative financial instruments

Strategy in using derivative financial instrumentsThe 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, US Dollar 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 2011 was a net liability of £116.5m (2010 £99.7m).

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 to economically hedge the interest rate risk associated with the mortgage pipeline. The resulting accounting hedge relationship is to hedge floating rate sterling liabilities. The total fair value of derivatives included within cash flow hedges at 31 December 2011 was a net asset of £2. 3m (2010 £3.2m).

29


1 6. Derivative financial instruments (continued)

c) Net investment hedges

The Group has not designated any derivatives as net investment hedges in 2011 or 2010.

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.

2011 2010 Contract/ Fair values Contract/ Fair values notional notional amount Assets Liabilities amount Assets LiabilitiesGroup £m £m £m £m £m £mDerivatives in accounting hedge relationshipsDerivatives designated as fair value hedgesInterest rate swaps 14,210.5 129.0 (245.5) 15,826.5 141.1 (240.8)Cross currency interest rate swaps 21.8 – – – – –

Derivatives designated as cashflow hedgesInterest rate swaps 1,264.4 4.1 (1.8) 163.5 3.2 –

133.1 (247.3) 144.3 (240.8)

Derivatives in economic hedging relationships but not in accounting hedge relationships 2011 2010 Contract/ Fair values Contract/ Fair values notional notional amount Assets Liabilities amount Assets LiabilitiesGroup £m £m £m £m £m £mInterest rate derivativesInterest rate swaps 6,462.9 47.9 (25.7) 4,852.5 4.7 (14.2)Credit risk swaps 1,089.5 – – – – –

Currency derivativesCross currency interest rate swaps 276.6 – (12.8) – – –Forward foreign exchange 21.4 – – – – –

Total recognised derivative assets/(liabilities) 181.0 (285.8) 149.0 (255.0)

2011 2010 Contract/ Fair values Contract/ Fair values notional notional amount Assets Liabilities amount Assets LiabilitiesCompany £m £m £m £m £m £mDerivatives in accounting hedge relationshipsDerivatives designated as fair value hedgesInterest rate swaps 14,210.5 129.0 (245.5) 15,826.5 141.1 (240.8)Cross currency interest rate swaps 21.8 – – – – –

Derivatives designated as cashflow hedges Interest rate swaps 1,264.4 4.1 (1.8) 163.5 3.2 –

133.1 (247.3) 144.3 (240.8)

Derivatives in economic hedging relationships but not in accounting hedge relationshipsInterest rate derivatives Interest rate swaps 6,462.9 47.9 (25.7) 4,852.5 4.7 (14.2)

Currency derivativesForward foreign exchange 21.4 – – – – –

Total recognised derivative assets/(liabilities) 181.0 (273.0) 149.0 (255.0)

30


1 6. Derivative financial instruments (continued)

Gains on fair value hedges 2011 2010 £m £m

On hedging instruments 6.9 5.3On the hedged items attributable to the hedged risk 9.7 8.0

Fair value hedge ineffectiveness 16.6 13.3

Fair value hedge ineffectiveness recorded within interest income in the income statement amounted to a credit of £ 30.8m (2010 £27.5m). Fair value hedge ineffectiveness recorded within interest expense in the income statement amounted to a charge of £14.2m (2010 £14.2m).

Cash flow hedges

Periods when cash flows are expected to occur and affect the income statement:

2011 2010 £m £m

Within one year 0.5 1.4In one to five years 0.4 –

0.9 1.4

Cash flow hedge ineffectiveness recorded within interest expense in the income statement amounted to a credit of £0.3m in 2011 (2010 less than £0.1m).

1 7. Loans and advances to banks

Group Company 2011 2010 2011 2010 £m £m £m £m

Fixed rate 312.0 101.4 312.0 101.4Variable rate 547.3 483.8 377.6 478.3

859.3 585.2 689.6 579.7

1 8. Loans and advances to customers


Advances secured on residential property not subject to securitisation 11,825.3 11,407.9 11,825.3 11,407.9Advances secured on residential property subject to securitisation 1,060.6 – 1,060.6 –

12,885.9 11,407.9 12,885.9 11,407.9Residential buy to let loans not subject to securitisation 1,083.6 791.5 1,083.6 791.5

Total advances secured on residential property 13,969.5 12,199.4 13,969.5 12,199.4

Unsecured loans not subject to securitisation 0.2 0.5 0.2 0.5Amounts due from subsidiary undertakings – – 52.7 –

Gross loans and advances to customers 13,969.7 12,199.9 14,022.4 12,199.9Impairment allowance (6.6) (2.4) (6.6) (2.4)

Net loans and advances to customers 13,963.1 12,197.5 14,015.8 12,197.5

Fixed rate 8,280.0 6,893.2 8,280.0 6,893.2Variable rate 5,683.1 5,304.3 5,735.8 5,304.3

13,963.1 12,197.5 14,015.8 12,197.5

In addition to the above, fair value adjustments of portfolio hedging amount to £195.9m (2010 £176.9m). These 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.

31


1 9. Securitisation

The Group’s results include the results and assets and liabilities of securitisation Special Purpose Entities (“SPEs”), none of which qualify for derecognition under IAS 39, on a line by line basis. Securitised advances are subject to non-recourse finance arrangements. These loans have been purchased at par from Northern Rock plc, and have been funded through the issue of mortgage backed bonds by the SPEs. The balances of assets subject to securitisation notes in issue at 31 December 2011 are as follows:

2011 Gross assets securitised Notes in issue £m £m

Gosforth Funding 2011-1 plc 1,164.4 1,090.0Retained interest in Gosforth Mortgages Trustee 2011-1 Limited 61.3 –Less notes retained by Northern Rock plc – (141.7)

1,225.7 948.3

The retained interest in Gosforth Mortgages Trustee 2011-1 Limited represents Northern Rock plc’s share of the assets held by Gosforth Mortgages Trustee 2011-1 Limited.

Gross assets securitised and notes in issue as presented above reconcile to amounts included in the consolidated balance sheet within loans and advances to customers and debt securities as follows:

Gross assets securitised Notes in issue £m £m

Total as above 1,225.7 948.3Less cash deposits with third parties included within loans and advances to banks (165. 1) Less accrued interest on loan notes included within accruals and deferred income (4.6)

Total advances subject to securitisation (note 1 8) 1,060.6

Total securitised notes as per consolidated balance sheet 943.7

Many of the securitised notes are issued in foreign currency and are translated into sterling at exchange rates prevailing at 31 December. All issuance in foreign currency is subject to cross currency swaps that provide the amounts of foreign currency required to repay the notes in exchange for an amount of sterling fixed at the outset of the securitisation, thereby protecting against foreign exchange risk. At 31 December 2011 there is a gross derivative liability on derivatives economically hedging the foreign currency notes of £12.8m. The value of the loans assigned to the bankruptcy remote special purpose vehicles exceed the value of sterling required under the foreign exchange swaps, and therefore the debt securities in issue are more than covered by loan assets allocated for this purpose.

20. Investment securities


Available for sale securities 1,235.4 363.2Investment securities held as loans and receivables 126.5 297.8

1,361.9 661.0

a) Available for sale securities


At fair valueListed 1,049.4 363.2Unlisted 186.0 –

1,235.4 363.2

Fixed rate 471.4 363.2Variable rate 764.0 –

1,235.4 363.2

32


20. Investment securities (continued)

The movement in available for sale securities was as follows:


At 1 January 363.2 –Transferred from Northern Rock (Asset Management) plc – 55.4Additions 9,708.7 1,028.6Disposals (sales and redemptions) (8,823.6) (710.5)Exchange differences (3.7) (9.8)Net losses on changes in fair value (9.2) (0.5)

At 31 December 1,235.4 363.2

b) Investment securities held as loans and receivables


Carrying value 126.5 297.8Fair value 124.6 299.4

Listed 126.5 297.8Unlisted – –

126.5 297.8

Fixed rate – –Variable rate 126.5 297.8

126.5 297.8

At 31 December 2011 available for sale securities with a carrying value of £12.0m (2010 £nil) and investment securities held as loans and receivables with a carrying value of £86.0m (2010 £nil) have been sold under sale and repurchase agreements. These assets have not been derecognised as the Group has retained substantially all the risks and rewards of ownership. The corresponding counterparty liability is included within deposits by banks.

Gains on sale of available for sale securities amounted to £68.3m (2010 £nil) and were predominantly from the sale of UK gilt holdings. There were some gilt sales in the first half of 2011 in order to demonstrate the liquidity of investment securities, but principally the gains arose in the latter part of the year due to an agreement to sell the UK gilt portfolio ahead of the sale of Northern Rock plc to Virgin Money Holdings (UK) Limited.

2 1. Shares in group undertakings

The principal subsidiary of Northern Rock plc at 31 December 2011 is listed below. It operates in its country of incorporation and is directly held and wholly owned by the Company:

Country of Nature of business incorporationNorthern 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.

The investment is in the ordinary shares of Northern Rock (Guernsey) Limited and the cost at 31 December 2011 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 incorporationGosforth Funding plc Issue of securitised notes England & Wales 3 December 2009Gosforth Funding 2011-1 plc Issue of securitised notes England & Wales 30 October 2009Gosforth Mortgages Trustee Limited Trust England & Wales 12 October 2009Gosforth Mortgages Trustee 2011-1 Limited Trust England & Wales 5 January 2010Gosforth Holdings Limited Holding company England & Wales 12 October 2009Gosforth Holdings 2011-1 Limited Holding company England & Wales 4 January 2010

Gosforth Funding 2011-1 plc, Gosforth Mortgages Trustee 2011-1 Limited and Gosforth Holdings 2011-1 Limited changed name in the year. The companies were previously known as Gosforth Funding 2010-1 plc, Gosforth Mortgages Trustee 2010-1 Limited and Gosforth Holdings 2010-1 Limited respectively.

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2 2. Intangible assets

Group and Company Software £m2011 Cost At 1 January 2011 22.4Additions 1.6Disposals –

At 31 December 2011 24.0

Accumulated amortisation At 1 January 2011 11.3Amortisation charged in year 8.1Adjustment arising on disposals –


Net book amount: At 31 December 2011 4.6

Group and Company Software £m2010Cost At 1 January 2010 –Transfer from Northern Rock (Asset Management) plc 23.1Additions 3.8Disposals (4.5)


Accumulated amortisation At 1 January 2010 –Transfer from Northern Rock (Asset Management) plc 0.1Amortisation charged in year 12.6Adjustment arising on disposals (1.4)


Net book amount:At 31 December 2010 11.1

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2 3. Property, plant and equipment

Group and Company Plant, equipment, fixtures, Land and fittings and buildings vehicles Total2011 £m £m £mCost At 1 January 2011 17.0 27.0 44.0Additions – 1.6 1.6Disposals (2.3) (0.5) (2.8)

At 31 December 2011 14.7 28.1 42.8

Accumulated depreciationAt 1 January 2011 0.7 8.6 9.3Charged in year 0.7 5.2 5.9Adjustment arising on disposals (0.1) (0.2) (0.3)

At 31 December 2011 1.3 13.6 14.9

Net book amount:At 31 December 2011 13.4 14.5 27.9

Group and Company Plant, equipment, fixtures, Land and fittings and buildings vehicles Total2010 £m £m £mCost At 1 January 2010 – – –Transfer from Northern Rock (Asset Management) plc 15.8 16.9 32.7Additions 1.2 11.6 12.8Disposals – (1.5) (1.5)

At 31 December 2010 17.0 27.0 44.0

Accumulated depreciation At 1 January 2010 – – –Charged in year 0.7 8.9 9.6Adjustment arising on disposals – (0.3) (0.3)

At 31 December 2010 0.7 8.6 9.3

Net book amount:At 31 December 2010 16.3 18.4 34.7

2 4. 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, the Directors 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:


Excess of depreciation over capital allowances (gross) 47.3 34.8Unused tax losses (gross) 2 37.3 200.0Pensions and other employee benefits (gross) (1.5) (3.1)Other employee benefits (gross) 2.1 –Change in accounting basis on adoption of IFRS (gross) 21.9 27.4

307.1 259.1

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.

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2 5. Deposits by banks


Fixed rate 86.9 –Variable rate 11.3 0.7

98.2 0.7

2 6. Customer accounts


Retail funds and deposits 16,550.1 16,691.3 16,550.1 16,691.3Amounts due to securitisation special purpose entities – – 852.1 –Other customer accounts 133.1 211.9 133.1 211.9

16,683.2 16,903.2 17,535.3 16,903.2

Fixed rate 8,436.0 10,347.9 8,436.0 10,347.9Variable rate 8,247.2 6,555.3 9,099.3 6,555.3

16,683.2 16,903.2 17,535.3 16,903.2

At 31 December 2011 retail funds and deposits of £396.0m were held for resale.

2 7. Accruals and deferred income


Accrued interest 124.9 119.7 120.4 119.7Other accruals 31.6 44.9 31.6 44.9

156.5 164.6 152.0 164.6

2 8. Provisions for liabilities and charges


The movement in provisions was as follows:

At 1 January 7.4 –Charged in the year 12.6 25.4Utilised in the year ( 12.2) (18.0)

At 31 December 7.8 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.

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2 9. Share capital

2011 2011 2010 2010 Number (million) £m Number (million) £mAuthorised share capitalOrdinary shares of £1 each 1,400.0 1,400.0 1,400.0 1,400.0

2011 2011 2010 2010 Number (million) £m Number (million) £mIssued and fully paid share capitalOrdinary shares of £1 each 1,400.0 1,400.0 1,400.0 1,400.0

2011 2010 Number Number

Balance at 1 January 1,400,000,000 50,000Issuance of ordinary shares – 1,399,950 ,000

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

No dividends were paid in 2011 or 2010.

30. Other reserves

a) Revaluation reserve – available for sale investments


Balance at 1 January (6.9) –Transfer from Northern Rock (Asset Management) plc – (16.2)Net gains/(losses) from changes in fair value 98.0 (1.6)Net gains on disposal transferred to net income (109.0) –Amounts transferred to net income due to hedge accounting (11.4) –Amortisation of fair value differences in respect of securities transferred to loans and receivables 5.9 10.9

Balance at 31 December (23.4) (6.9)

b) Hedging reserve – cash flow hedges 2011 2010 £m £mBalance at 1 January 1.4 –Amounts recognised in equity 0.3 1.5Amounts transferred to interest payable (0.8) (0.1)

Balance at 31 December 0.9 1.4

Total other reservesAt 31 December (22.5) (5.5)

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3 1. Financial risk management

A) Financial Risk ManagementBoard Structure & Governance

Since the restructuring of Northern Rock on 1 January 2010 and until the acquisition by Virgin Money Holdings (UK) Limited, the governance was 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 worked in practice. In accordance with the Framework Document, the Company operated 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, took appropriate account of best practice for a company listed on the Official List, including the Combined Code.

The Board operated the following main committees:

• Audit Committee

• Risk Committee

• Remuneration Committee

• Nominations Committee

The diagram below shows the governance structure in operation at Northern Rock plc during 2011.

BOARD

Board Level Governance

Management Level GovernanceEXECUTIVE

COMMITTEE

NOMINATIONCOMMITTEE

RISKCOMMITTEE

AUDITCOMMITTEE

REMUNERATIONCOMMITTEE

ASSET ANDLIABILITY

COMMITTEE

RETAILCREDIT RISKCOMMITTEE

OPERATIONALRISK AND

COMPLIANCECOMMITTEE

CUSTOMERPERFORMANCE

COMMITTEE

OPERATINGPLAN

COMMITTEE

The BoardThe Board had a written schedule of matters reserved for its determination. Reserved matters included 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.

In 2011, the Board comprised Mr Sandler (Executive Chairman and Chair of Nominations Committee), Mr Adams (Non-Executive Director – Chair of Risk Committee), Mr Coates (Non-Executive Director – Chair of Audit Committee), Mr Pain (Non-Executive Director), Ms Phibbs (Non-Executive Director), Mr Fairey (Non-Executive Director – Chair of Remuneration Committee), Mr Morgan (Non-Executive Director) and Mr McConville (Executive Director – Chief Financial Officer).

Board CommitteesIn accordance with the requirements in the Framework Document, the Board ha d a number of Committees. The Chairman and membership of each Committee are set out below. Each Committee ha d detailed terms of reference clearly setting out its remit and authority. The terms of reference were regularly reviewed by the Board. The following paragraphs set out details of the Committees and the particular work that they undert ook.

Audit CommitteeThe Committee consider ed and, where appropriate, advise d the Board on all matters relating to regulatory, prudential and accounting requirements that affect the Company. It reported 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 oversaw anti-money laundering and whistle blowing procedures.

An important aspect of its role was to ensure that an objective and professional relationship was maintained with the external auditors. The Audit Committee ha d responsibility for recommending the appointment, re-appointment and removal of the external auditors.

The Audit Committee reviewed the scope and results of the annual external audit, its cost effectiveness, and the independence and objectivity of the external auditors. It also reviewed the nature and extent of any non-audit services provided by the external auditors. The external auditors could attend all meetings of the Audit Committee, had direct access to the Committee and its Chairman at all times and were invited at least annually to meet with the Committee in the absence of management.

The Head of Internal Audit provide d further assurance that the significant risks identified by the business were properly managed through attendance at key committees and delivery of the risk based audit plan. The Head of Internal Audit also ha d direct access to the Audit Committee and its Chairman. The Committee regularly receive d reports of reviews conducted throughout the Company by the Internal Audit function.

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3 1. Financial risk management (continued)

Risk CommitteeThe main role of the Risk Committee was 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 require d the Risk Committee to keep under review the effectiveness of the Company’s risk management frameworks and systems of internal control (which include d financial, operational, compliance and risk management controls), and to foster a culture that emphasise d and demonstrate d the benefits of a risk-based approach to internal control and management of the Company. The Risk Committee fulfil led 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 was also responsible for considering the current and prospective macroeconomic and financial environment.

The Risk Committee regularly review ed reports from Compliance including regulatory risks and issues and was also responsible for approval, and ongoing review and oversight of progress of the compliance monitoring plan. The Committee also receive d 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.

To assist the Board in discharging its responsibilities for the setting of risk policy, the Risk Committee regularly review ed the Company’s material risk exposures in relation to the Board’s risk appetite and the Company’s capital adequacy. The Risk Committee also ensure d that the public disclosure of information regarding the Company’s risk management policies and key risk exposures was in accordance with statutory requirements and financial reporting standards.

Nominations CommitteeSubject to compliance with the requirements of the Framework Document, the Committee monitor ed and review ed the membership of, and succession to, the Board of Directors and the Committee ma de recommendations to the Board in this regard. One of its functions was 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.

Remuneration CommitteeSubject to compliance with the requirements of the Framework Document (as set out above), the Committee was 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 Committee could take professional advice from within and outside the Company.

It was 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 determine d the level of remuneration for the Company’s Executive Committee Directors (comprising management at the level immediately below the Board).

Executive CommitteeThe Board delegate d authority to the Executive Committee to oversee the prudent day to day management of the Company’s affairs. In 2011, the Committee comprised Mr Sandler (Executive Chairman), Ms Belsham (Director of Transition Management), 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), Mrs Thompson (HR Director) and Mr Fitzpatrick (General Counsel and Company Secretary).

The Committee consider ed, 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, was 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 exist ed.

The following sub-committees which report to the Executive Committee were in place. • Retail Credit Risk Committee

• Operational Risk and Compliance Committee

• Asset and Liabilit y Committee

• Operating Plan Committee

• Customer Performance Committee

Details of the operation of these sub-committees are set out below.

Retail Credit Risk Committee (RCRC) was the principal body through which all aspects of Retail Credit Risk are monitored, reported and controlled. It was the most senior retail credit decision making authority below the Board. It primarily act ed as the formal designated Committee to manage all retail credit related aspects of Basel II – Capital Requirement Directive. RCRC develop ed and recommend ed a Retail Credit Risk Appetite for approval by ExCo and the Board (via Risk Committee). It also review ed and approve d Credit Risk Strategy and Policy. In addition, RCRC ensure d the Company ha d policies and processes which supported Responsible Lending and the fair treatment of customers at all times.

RCRC review ed detailed portfolio monitoring reports to ensure that performance and quality of credit risk portfolios remain ed within agreed risk appetite, submitt ed appropriate summary information to the Risk Committee. RCRC review ed and recommend ed any necessary changes to credit risk models and established a credit sanctioning and approval framework, within which formal lending authorities were delegated and controlled throughout the organisation. It establishe d lower level working groups to ensure suitably skilled cross functional experts ha d the opportunity to review specific matters in detail before submission to RCRC.

Operational Risk and Compliance Committee (ORCC) was the executive level committee through which all aspects of the high level operational risk and control environment are monitored. ORCC develop ed and recommend ed the Operational Risk Policies and Risk Appetite for approval by ExCo and the Board. ORCC regularly review ed all operational losses in line with risk appetite and budgets. It also review ed other significant risk events and failures in order to enhance Operational Risk management. ORCC develop ed and recommend ed legal and regulatory risk policies, consider ed new/revised regulatory requirements and review ed regulated product complaint trends.

Asset and Liability Committee (ALCO) was 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 was 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 manage d the Group’s liquidity resources to meet internal and regulatory liquidity requirements, and it monitor ed the Group’s secured funding activities and vehicles. ALCO was responsible for ensuring that the bank holds adequate capital resources, and was responsible for ensuring that the Internal Capital Adequacy Assessment Process (“ICAAP”) was reviewed and approved.

Operating Plan Committee (OPC) was responsible for overseeing, reviewing and challenging the progress towards delivery of the Operating Plan. OPC monitor ed Business Plan variances and recommend ed changes to the Operating Plan where necessary. It also manage d the discretionary investment budget and overs aw progress of all major projects.

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Customer Performance Committee (CPC) was responsible for the Customer Experience Framework and Treating Customers Fairly (TCF). It direct ed the identification and implementation of customer improvements, and the ongoing sustainability and improvement in delivering fair customer outcomes.

Internal Control & Risk ManagementMaterial 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 was responsible for the Company’s system of risk management, regulatory compliance and internal control. The systems were designed to ensure that the key risks taken by the Company in the conduct of its business were identified and evaluated so that appropriate controls were put in place to manage those risks. Such systems were 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 2011 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.

Risk ManagementDefinitions

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

• Credit Concentration risk: the current or prospective risk to earnings and capital which may impact on any associate top level risk arising from significant exposures to groups of counterparts whose likelihood of default is driven by common underlying factors (e.g. sector, economy, geographical location, instrument type)

• 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:




• Risks to market confidence or stability, and

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

Strategic Risk ManagementThe Group maintained a Strategic Risk Radar to assess and monitor its material macroeconomic and event specific risks. This report was subject to regular review by ExCo, Risk Committee and the Board. It was used to support strategic planning, refine operational priorities and ensure that mitigants and contingency plans were in place.

At the end of 2011 and beginning of 2012, the principal strategic risks and uncertainties faced by the Group can be broadly summarised as follows:

i) Business risk (i.e. establishing a sustainable business model for the new Group) – the Business Plan has been formulated to address this directly.

ii) Macroeconomic risk – 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.

iii) Risks relating to the remaining activities to separate Northern Rock plc from Northern Rock (Asset Management) plc.

Developments in Risk ManagementDuring 2011, the Group has continued to make significant progress in its Risk Management capabilities. The CRO ha d an independent reporting line directly to the Executive Chairman and report ed on a dotted line basis to the Chair of the Risk Committee. As the independent second line of defence, the Risk function t ook an integrated, holistic view of risks and ensure d 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 2011 include:

• Continued development of Internal Ratings Basis (IRB) models for Credit Risk via migration to a Waiver Constrained Variable Scalar PD model

• Continued development of embedded risk management capability with front line/business challenge

• Enhancing Operational Risk processes and reporting

• Improved Liquidity Risk monitoring processes, systems and controls; and

• Enhancing 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 appetiteCredit 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 2011. Risk appetite is subject to an annual review process and limits are regularly monitored and reported to the Risk Committee.

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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 2011 .

Lending policy criteriaNew 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

• 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 MeasurementThe 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 RiskCorporate 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 provisions for impairment and before collateral and other credit enhancements:

2011 2010 £m £mOn balance sheetCash and balances with central banks 2,752.1 4,646.0Derivative financial instruments 181.0 149.0Loans and advances to banks 859.3 585.2Loans and advances to customers 13,969.7 12,199.9Investment securities 1,361.9 661.0

19,124.0 18,241.1

Off balance sheetLoan commitments 1,597.9 1,168.3

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Loans and advances by credit quality:2011 Unsecured Loans and Residential personal advances to banks mortgage loans loans £m £m £m

Neither past due nor impaired 859.3 13,808.9 0.2Past due but not impaired – 153.5 –Impaired – 7.1 –

859.3 13,969.5 0.2

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

Neither past due nor impaired 585.2 12,095.6 0.5Past due but not impaired – 101.8 –Impaired – 2.0 –

585.2 12,199.4 0.5

The credit quality of loans neither past due nor impaired may be assessed by reference to credit ratings and to probability of default bandings allocated to loans by the Company’s internal credit assessment models as set out in the tables below: 2011 2010 Loans and Loans and advances to advances to banks banks £m £m

AA – 8.3AA– 20.2 145.1A+ 167.2 365.3A 595.6 61.4A– 55.4 –BBB+ 20.9 –BB – 5.1

859.3 585.2

2011 2010 Residential Unsecured Residential Unsecured mortgage personal mortgage personal loans loans loans loans £m £m £m £m

PD band Risk 1 – very low risk 12,028.1 0.2 11,805.1 0.5Risk 2 – low risk 1,090.7 – 104.2 –Risk 3 – medium risk 568.8 – 137.9 –Risk 4 – higher risk 121.3 – 49.9 –

13,808.9 0.2 12,097.1 0.5

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Available for sale securities and investment securities held as loans and receivables by credit quality:

2011 2010 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 1,235.4 126.5 363.2 297.8Past due but not impaired – – – –Impaired – – – –

1,235.4 126.5 363.2 297.8

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: 2011 2010 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 824.9 108.7 363.2 234.0AA 33.1 – – 31.0AA– 14.9 9.0 – 19.8A+ 90.1 8.8 – 13.0A 272.4 – – –

Total 1,235.4 126.5 363.2 297.8

Past due not impaired loans:

Loans and Residential Unsecured advances to mortgage personal banks loans loans2011 £m £m £m

Up to one month – – –In one to three months – 99.4 –In three to six months – 36.1 –Over six months – 18.0 –

– 153.5 –

Loans and Residential Unsecured advances to mortgage personal banks loans loans2010 £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 –

Renegotiated loans that would otherwise be past due or impaired at 31 December 2011 were £nil (2010 £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 2011 amounted to £11.3m (2010 £0.7m), residential property held amounted to £34,721.7m (2010 £25,722.0m). The table below shows an estimate of the fair value of collateral held against financial assets.

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Loans and Residential Derivative advances to mortgage financial banks loans instruments2011 £m £m £m

Neither past due nor impaired Property – 34,472.9 –Cash – – 11.3Other – – – Past due but not impaired Property – 233.3 –Cash – – –Other – – – Impaired Property – 15.5 –Cash – – –Other – – –

Total – 34,721.7 11.3

Loans and Residential Derivative advances to mortgage financial banks loans instruments2010 £m £m £m

Neither past due nor impaired Property – 25,556.7 –Cash – – 0.7Other – – – Past due but not impaired Property – 164.5 –Cash – – –Other – – – Impaired Property – 0.8 –Cash – – –Other – – –

Total – 25,722.0 0.7

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.

In addition the Group provide a number of forbearance tools to enable mortgage customers who are in temporary financial difficulty to remain in their property. The forbearance tools are as follows:

• Arrangement to pay less than the contractual payment,

• Transfer to an interest only method of repayment,

• Extension to the original mortgage term,

• Capitalisation of arrears, and

• Arrangements with customers where the agreed mortgage term has expired and the mortgage loan is not repaid in full.

At 31 December 2011 residential mortgage loans of £484.7m (2010 £349.3m) that are neither past due nor impaired had benefited from a forbearance tool. Provisioning methodology recognises the use of forbearance tools and these mortgage loans attract a higher level of provision when compared to rest of the up to date portfolio.

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Concentration riskConcentration risk is managed for retail and wholesale credit risk 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 Group has been proactive in its management of exposure to European sovereign debt. As at 31 December 2011 there are no outstanding exposures to Portugal, Italy, Greece and Spain, either from a direct sovereign exposure or from institutions domiciled in that country. The only exposure to Ireland is an operational bank balance of £0.4m relating to the sale of the retail deposit book in Ireland. The only European sovereign debt exposure at 31 December 2011 is a Finnish government bond with a carrying value of £199.7m.

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:

2011 UK Europe US Other countries Total £m £m £m £m £m Derivative financial instruments 111.3 8.5 36.0 25.2 181.0Loans and advances to banks 691.7 167.6 – – 859.3Loans and advances to customer Residential mortgage lending 13,963. 1 – – – 13,963. 1 Unsecured lending 0.1 – – – 0.1Available for sale securities 287.5 933.0 – 14.9 1,235.4Investment securities held as loans and receivables 120.3 – – 6.2 126.5

As at 31 December 2011 15,17 4.0 1,109.1 36.0 46.3 16,365. 4

2010 UK Europe US Other countries Total £m £m £m £m £m Derivative financial instruments 116.5 8.6 17.1 6.8 149.0Loans and advances to banks 507.2 74.8 – 3.2 585.2Loans and advances to customer Residential mortgage lending 12,197.2 – – – 12,197.2 Unsecured lending 0.3 – – – 0.3Available for sale securities – 363.2 – – 363.2Investment 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

LTV (%) – Indexed value as of financial year end Residential mortgage loans 2011 2010 £m £m <70% 8,392.7 7,981.470%-75% 1,941.3 1,544.775%-80% 1,364.5 1,254.180%-85% 1,050.5 780.085%-90% 856.5 424.890%-95% 275.0 149.395%-100% 49.5 51.7>100% 39.5 13.4

13,969.5 12,199.4

Loan size by outstanding balance

Outstanding balance Residential mortgage loans 2011 2010 £m £m £0-£100k 3,812.5 3,681.2£100k-£250k 6,614.6 5,520.6£250k-£500k 2,398.4 1,953.9£500k-£1m 935.3 816.3£1m-£2.5m 197.1 213.1>£2.5m 11.6 14.3

13,969.5 12,199.4

45



ii) Market RiskMarket 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 asset 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 predominatly 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 groups’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 £44.9m as at 31 December 2011 (2010 £11.2m).

The following table gives an analysis of the repricing periods of assets and liabilities on the balance sheet at 31 December.

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.

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 £m2011AssetsCash and balances with central banks 2,728.4 – – – – 23.7 2,752.1Loans and advances to banks 841.3 – – – – 18.0 859.3Loans and advances to customers 6,291.9 905.1 1,641.8 4,953.5 136.1 230.6 14,159.0Investment securities 1,035.1 35.0 45.0 50.0 190.9 5.9 1,361.9Other assets – – – – – 262.1 262.1

Total assets 10,896.7 940.1 1,686.8 5,003.5 327.0 540.3 19,394.4

Liabilities Deposits by banks 98.2 – – – – – 98.2Customer accounts 9,531.1 1,183.3 2,046.6 3,823.5 – 98.7 16,683.2Debt securities in issue 943.7 – – – – – 943.7Other liabilities – – – – – 519. 0 519. 0Equity – – – – – 1,150. 3 1,150. 3

Total liabilities 10,573.0 1,183.3 2,046.6 3,823.5 – 1,768.0 19,394.4Notional values of derivatives affecting interest rate sensitivity 202.7 (55.1) (884.3) 46.4 702.6 (12.3) –

10,775.7 1,128.2 1,162.3 3,869.9 702.6 1,755.7 19,394.4

Total interest rate sensitivity gap 121.0 (188.1) 524.5 1,133.6 (375.6) (1,215.4) –

Cumulative interest rate sensitivity gap 121.0 (67.1) 457.4 1,591.0 1,215.4 – –

46



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 £m2010AssetsCash and balances with central banks 4,619.7 – – – – 26.3 4,646.0Loans and advances to banks 576.7 – – – – 8.5 585.2Loans and advances to customers 5,544.0 572.6 1,218.2 4,302.9 528.0 208.7 12,374.4Investment securities 372.7 216.4 51.4 25.0 – (4.5) 661.0Other 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

LiabilitiesDeposits by banks 0.7 – – – – – 0.7Customer accounts 7,348.8 1,305.0 4,002.6 4,161.6 9.7 75.5 16,903.2Other liabilities – – – – – 470.4 470.4Equity – – – – – 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 18,561.8Notional 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 – –

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 £61.0m as at 31 December 2011 (2010 £15.4m).

Use of DerivativesThe 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.

Currency riskCurrency 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 sale of the Irish branch completed in January 2012 (see note 3 6). This will materially reduce the Group’s Euro currency exposures . 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 2011, assets exceeded liabilities denominated in € by €7.8m, or £6.5m after taking into account foreign currency derivatives (2010 liabilities exceeded assets by €1.2m/£1.0m). The Group was sensitive to exchange rate gains and losses of £0.1m for each 1cent movement in the £: € exchange rate at 31 December 2011 (2010 less than £0.1m).

47



The table below gives values of assets and liabilities at sterling carrying values denominated in Euros at the balance sheet date.

€ Total £m £m2011 AssetsLoans and advances to banks 407.8 407.8Investment securities 20.8 20.8Other assets 0.2 0.2

Total assets 428.8 428.8

LiabilitiesCustomer accounts 396.0 396.0Debt securities in issue 263.4 263.4Other liabilities 1.2 1.2

Total liabilities 660.6 660.6Notional value of derivatives affecting currency exposures (238.3) (238.3)

422.3 422.3

Net position 6.5 6.5

€ Total £m £m2010AssetsCash and balances with central banks 0.8 0.8Loans and advances to banks 334.1 334.1Investment securities 309.6 309.6Other assets 0.1 0.1

Total assets 644.6 644.6

LiabilitiesCustomer accounts 644.2 644.2Other liabilities 1.4 1.4

Total liabilities 645.6 645.6

Net position (1.0) (1.0)

Fair values of financial assets and liabilitiesThe 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.

Carrying value Fair value 2011 2010 2011 2010 £m £m £m £mFinancial assetsCash and balances with central banks 2,752.1 4,646.0 2,752.1 4,646.0Loans and advances to banks 859.3 585.2 859.3 585.2Loans and advances to customers 13,963.1 12,197.5 13,939.4 12,218.2Investment securities held as loans and receivables 126.5 297.8 124.6 299.4

Financial liabilitiesDeposits by banks 98.2 0.7 98.2 0.7Customer accounts 16,683.2 16,903.2 16,654.4 17,202.2Debt securities in issue 943.7 – 943.7 –

Valuation methods for calculations of fair values in this table are set out below:

Cash and balances with central banksFair 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 banksFair 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.

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Loans and advances to customersThe 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 receivablesFair values are based on quoted prices where available or by using discounted cash flows applying market rates.

Deposits by banks and customer accountsFair 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).

2011 Level 1 Level 2 Level 3 Total £m £m £m £m Financial assetsDerivative financial instruments – 181.0 – 181.0Available for sale securities 947.2 288.2 – 1,235.4Financial liabilitiesDerivative financial instruments – 285.8 – 285.8

2010 Level 1 Level 2 Level 3 Total £m £m £m £m

Financial assets Derivative financial instruments – 149.0 – 149.0Available for sale securities – 363.2 – 363.2Financial liabilitiesDerivative financial instruments – 255.0 – 255.0

iii) Liquidity riskLiquidity risk represents the risk of being unable to pay liabilities as they fall due and arises from the mismatch in cash flows generated from current and expected assets, liabilities and derivatives. The group has a robust liquidity management framework, with a liquidity risk appetite based on maintaining sufficient liquidity resources to survive a variety of stress events.

Under the framework:

• A minimum of 80% of the total liquidity portfolio will be held in “buffer” eligible assets as defined in BIPRU 12.7. Qualifying assets comprise UK and Euro Government debt, securities issued by designated multilateral development banks, or reserves in the form of sight deposits with the central banks of the UK or Ireland

• In addition, buffer liquidity must be held in excess of the regulatory ILG given by the FSA, with a Trigger Limit set at 10% and an Alert Level at 15%. This is calculated, monitored and managed

The liquidity framework governance structure operates within the Board’s delegated authorities and reports into 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 proposed daily cash flows to ensure key liquidity performance indicators are met. Any changes in legislation, regulation and other guidance which may affect the Group’s liquidity position are reported directly to the Chief Financial Officer. ALCO and Risk Committee receive monthly liquidity analysis and profiles and report directly to Executive Committee, which makes recommendations to the Board for its approval, and policies and strategies to ensure that capital and liquidity management are optimised to meet internal and external stakeholder requirements.

49



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.

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 £m2011 AssetsCash and balances with central banks 2,736.3 – – – 15.8 2,752.1Derivative financial instruments 4.3 5.1 15.3 137.9 18.4 181.0Loans and advances to banks 859.3 – – – – 859.3Loans and advances to customers 132.4 129.5 262.0 2,260.6 11,374.5 14,159.0Investment securities 131.6 35.4 95.1 766.9 332.9 1,361.9Other assets 44.2 1.7 1.0 0.3 33.9 81.1

Total assets 3,908.1 171.7 373.4 3,165.7 11,775.5 19,394.4

LiabilitiesDeposits by banks 98.2 – – – – 98.2Customer accounts 11,950.2 774.4 1,440.1 2,518.5 – 16,683.2Debt securities in issue – – – – 943.7 943.7Derivative financial instruments 6.6 5.9 9.2 145.7 118.4 285.8Other liabilities 165.0 19.5 37.8 10.9 – 233.2

Total liabilities 12,220.0 799.8 1,487.1 2,675.1 1,062.1 18,244.1

Net liquidity gap (8,311.9) (628.1) (1,113.7) 490.6 10,713.4 1,150.3

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 £m2010AssetsCash and balances with central banks 4,615.1 – – – 30.9 4,646.0Derivative financial instruments 2.3 7.8 26.3 112.2 0.4 149.0Loans and advances to banks 575.2 10.0 – – – 585.2Loans and advances to customers 113.1 109.8 222.2 1,946.8 9,982.5 12,374.4Investment securities 105.0 219.4 71.3 27.4 237.9 661.0Other 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

LiabilitiesDeposits by banks 0.7 – – – – 0.7Customer accounts 9,348.0 959.1 3,472.5 3,123.6 – 16,903.2Derivative financial instruments 2.2 7.8 18.0 159.4 67.6 255.0Other 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

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Non derivative cash flowsThe 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.

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 £m2011 LiabilitiesDeposits by banks 98.4 – – – – 98.4Customer accounts 11,971.1 810.6 1,578.0 2,767.1 18.8 17,145.6

12,069.5 810.6 1,578.0 2,767.1 18.8 17,244.0

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 £m2010Liabilities Deposits by banks 0.7 – – – – 0.7Customer 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

Derivative cash flowsThe 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.

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 £m2011 Derivatives in economic but not accounting hedges ( 2.4) ( 2.0) ( 5.4) (1 2.3) (3. 4) ( 25.5)Derivatives in accounting hedge relationships (30.6) (21. 5) (37.2) (143.0) (18.6) (250.9)

(3 3.0) (2 3.5) (4 2.6) (15 5.3) (2 2.0) (2 76.4)

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 £m2010 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)

51



The following table analyses cash flows for the Group’s derivative financial liabilities that will be settled on a gross 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 cross currency interest rate swaps and forward currency contracts.

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 £m2011 Derivatives in economic but not accounting hedges Outflows (67.1) (43.1) (77.4) (96.4) – (284.0)Inflows 63.9 41.0 73.6 92.5 – 271.0

iv) Operational riskThe 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.

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 2011 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 riskThe 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. In 2011 this was headed by an independent Legal professional who report ed 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 riskRegulatory risk is defined as the risk of the group failing to comply with the legal or regulatory requirements applying to its arrangements and activities, with the potential consequences of:




• 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 Operational Risk and Compliance Committee, Executive Committee and Risk Committee on a regular basis.

vii) Planned developments in 2012Following acquisition by Virgin Money Holdings (UK) Limited, the combined Group is reviewing its risk framework, risk appetite and Board approved policy suite as part of the wider integration programme to harmonise the two businesses.

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 2011, the Group applied the Advanced Internal Ratings Based (AIRB) approach for residential mortgages and the Standardised approach for treasury portfolios and operational risk.

52



Total available capital resources are shown in the table below and are available without restriction in order to meet the Company’s regulatory capital requirements. The Company complied with all of the externally imposed capital requirements to which it is subject.

2011 2010 £m £mCore Tier 1 Ordinary share capital 1,400.0 1,400.0Retained earnings ( 230.1) (211.6)Pension scheme (3.3) (2.8)

Total Core Tier 1 capital 1,166.6 1,185.6 Regulatory deductions from Tier 1 (37.1) (42.5)

Tier 1 capital after deductions 1,129.5 1,143.1

Total available capital resources 1,129.5 1,143.1

C) Contingent Liabilities

The Financial Services Compensation SchemeThe 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 2011, the Group has estimated the management expense levy and charged £11.0m in respect of its current obligation to meet management expense levies (2010 £7.6m).

If the FSCS does not receive sufficient funds from the failed institutions to repay HM Treasury in full, it will raise compensation levies. On 8 March 2012 the FSCS announced that it expects to receive full repayment of the debt in relation to Bradford & Bingley plc and that it expects to raise compensation levies in respect of other failed banks beginning in 2013/14 in the light of market conditions. 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 . Accordingly no provision for compensation levies, which could be significant, has been made in these financial statements.

3 2. Off balance sheet items

Loan commitmentsContractual amounts to which the Group is committed for extension of credit to customers are summarised in the table below.

Operating lease commitmentsMinimum future lease payments under non-cancellable operating leases are summarised in the table below.

Capital commitmentsCapital commitments for the acquisition of buildings and equipment are summarised in the table below.

Within In one to Over one year five years five years Total £m £m £m £m2011 Loan commitments 771.8 – 826.1 1,597.9Operating lease commitments Land and buildings 10.9 12.0 9.9 32.8 Other operating leases 5.4 6.8 – 12.2Capital commitments Software 1.7 0.1 – 1.8

789.8 18.9 836.0 1,644.7

Within In one to Over one year five years five years Total £m £m £m £m2010Loan commitments 337.8 – 830.5 1,168.3Operating lease commitments Land and buildings 7.3 12.2 13.6 33.1 Other operating leases 4.0 12.2 – 16.2Capital commitments Software 4.1 – – 4.1

353.2 24.4 844.1 1,221.7

53


3 3. Collateral pledged and received

Cash collateral is given and received as part of normal derivative operations. At 31 December 2011, £117.8m (2010 £91.0m) had been pledged and £11.3m (2010 £0.7m) had been received as cash collateral. In addition the Group has pledged securities collateral with a value of £30.2m (2010 £27.9m).

All collateral balances are the same in Group and Company.

3 4. 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 2011 2010 £m £mLoans Loans outstanding at 1 January 0.2 –Transfer of loans from Northern Rock (Asset Management) plc – 1.0Net amounts repaid – (0.8)

Loans outstanding at 31 December 0.2 0.2

Interest income paid – –

DepositsDeposits outstanding at 1 January – –Net amounts deposit ed 0.1 –

Deposits outstanding at 31 December 0.1 –

Interest income earned – –

2011 2010 £m £mDirectors and key management personnelSalaries and other short term benefits 4. 2 5. 8Post-employment benefits 0. 3 0.6Other long term benefits 2.1 0.4Termination benefits (receivable following the acquisition by Virgin Money Holdings (UK) Limited) 2.0 –

8.6 6.8

At 31 December 2011, the Company regarded HM Government as a related party. On 1 January 2010, a loan from HM Government of £1,400.0m was converted into share capital. At 31 December 2011, the Company holds cash with the Bank of England of £2,728.4m (2010 £4,607.0m).

There are service level agreements in place between the Company and Northern Rock (Asset Management) plc and Bradford & Bingley plc, companies that were under common ownership until 1 January 2012. Under the terms of the agreement, the Company provides a number of services to Northern Rock (Asset Management) plc and Bradford & Bingley, including IT and various administrative services, and as a result received income in 2011 of £28.7m (2010 £168.3m). In addition Northern Rock (Asset Management) plc provides certain treasury services to the Company for which the Company paid £2.8m in 2011 (2010 £0.7m).

At 31 December 2011, the balance owed by the Company to Northern Rock (Asset Management) plc is £0.7m (2010 Northern Rock (Asset Management) plc owed the Company £74.4m). This amount is unsecured and is recorded in other assets or other liabilities in the balance sheet.

Northern Rock (Asset Management) plc provided an indemnity to the Company against potential claims arising from past business up to a maximum of £100m. This indemnity ceased on completion of the sale of Northern Rock plc to Virgin Money Holdings (UK) Limited.

Mr L P Adams, Non-Executive Director of Northern Rock plc until 1 January 2012, is also a Director and shareholder of Outside Insight Limited. In 2011, Outside Insight Limited provided coaching services to key management personnel of Northern Rock plc and received income of £7k.

3 5. 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 2011 2010 2011 2010 £m £m £m £m Cash and balances with central banks 2,736.3 4,615.9 2,736.3 4,615.9Loans and advances to banks 859.3 575.2 689.6 569.7Investment securities 50.0 – 50.0 –

3,645.6 5,191.1 3,475.9 5,185.6

54


3 6. Events after the balance sheet date

Acquisition by Virgin Money Holdings (UK) LimitedOn 1 January 2012, Virgin Money Holdings (UK) Limited acquired 100% of the ordinary share capital of Northern Rock plc. On 2 January 2012, Northern Rock plc acquired 100% of the ordinary share capital of Virgin Money Limited from Virgin Money Holdings (UK) Limited. The purchase consideration of £330.0m represents the fair value of Virgin Money Limited and is based on a discounted cash flow model of the future earnings of the company. The valuation was carried out by an independent third party.

Sale of deposit bookDuring 2011, the Company agreed the sale of its funding operations in Ireland to Irish Life & Permanent plc. This sale completed on 3 January 2012 when the company transferred retail funds and deposits of £396.0m. The company paid an equivalent balance of cash (held within loans and advances to banks at 31 December 2011) as no significant assets were transferred in the sale. It is presented separately in the income statement as a discontinued operation and the transferred balances were classified as ‘held for sale’ at 31 December 2011. The sale premium amounted to £16.9m, net of tax of £6.1m and of other costs directly attributable to the sale.

The loss for the year from discontinued operations is analysed as follows:

2011 £m Interest and similar income 6.2Interest and similar expense (13.6)

Net interest income (7.4) Administrative expenses (1.6)

Loss for the year (9.0)

3 7. Ultimate controlling party

As at 31 December 2011 the Company considered Her Majesty’s Government to be the ultimate controlling party. From 1 January 2012, the parent company of Northern Rock plc is Virgin Money Holdings (UK) Limited. No single entity or individual has a controlling interest in Virgin Money Holdings (UK) Limited. The shareholder base of Virgin Money Holdings (UK) Limited includes two shareholders who together own more than 90% of the Ordinary Shares with the remainder of the shares held by a combination of corporate and private shareholders.

CONTENTSCompany Information 1

Directors’ Report 2

Independent Auditors’ Report to the Shareholder of Northern Rock plc 7

Consolidated Income Statement 8

Consolidated Statement of Comprehensive Income 9

Consolidated Balance Sheet 10

Company Balance Sheet 11

Consolidated Statement of Changes in Equity 12

Company Statement of Changes in Equity 13

Consolidated Cash Flow Statement 14

Company Cash Flow Statement 15

Notes to the Accounts 16

Presentation of Information

On 17 February 2008, the Chancellor of the Exchequer announced that the Government had decided to take Northern Rock into a period of temporary public ownership and on 22 February 2008 the Banking (Special Provisions) Bill received Royal Assent. HM Treasury made an order on 22 February 2008 which transferred all of the Ordinary, Preference and Foundation Shares in Northern Rock to the Treasury Solicitor as the Treasury’s nominee.

The legislation includes provisions such that Change of Control provisions in any of the Company’s contractual arrangements have not been triggered. Details of the impact of temporary public ownership are given throughout this Annual Report and Accounts as it affects the Company’s operations and financial disclosures.

As Northern Rock has previously published financial statements which have been prepared in accordance with EU endorsed International Financial Reporting Stand-ards (“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 4PLRegistered in England and Wales under Company Number 06952311 www.northernrock.co.uk

northern rock plc, registered office: northern rock house ... · registered office northern rock...

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