Shareholder Executive

Northern Rock

Purpose

Northern Rock is a retail savings and mortgages focussed bank based in the North East of England.

Legal Status and Ownership

Following its transition to temporary public ownership (TPO), Northern Rock is a Government owned bank regulated by the Financial Services Authority (FSA). The Treasury Solicitor holds 100% of the share capital of the business on behalf of HM Treasury.

Government Objectives

The Tripartite Authorities' stated objectives for Northern Rock under TPO are to protect taxpayers, maintain wider financial stability and protect consumers. Within this overall framework, Northern Rock's prime objectives are to:

• repay the Bank of England loan facilities
• release the HM Treasury guarantee arrangements
• return to the private sector at the earliest and most prudent opportunity.

In order to deliver against these objectives, Northern Rock has the following strategic priorities:

• contraction of balance sheet from £107bn in 2007 to around £50bn by 2011 in order for the loan facilities to be paid back by the end of 2010
• aspiration for releasing all guarantee arrangements by the end of 2011
• competitive framework constrains the actions of Northern Rock so that competitive distortions are avoided
• build a stand-alone funding and capital position
• strengthen the risk and control environment.

Northern Rock is managed at arms' length from the Government on commercial principles. The principles governing the arrangement between the Government and Northern Rock are set out in an agreed Shareholder Relationship Framework Document. Northern Rock's board have the freedom to act to deliver the Business Plan but the Government will, on behalf of the taxpayer, and like any other responsible shareholder, play an active role in holding the company to account for its performance.

Financial Performance*

£m	2007	2006	2005
Turnover1	899	968	880
Profit/(Loss) before tax	(168)	627	494
Profit/(Loss) for the year	(199)	443	349
Net Cash flow	(4,882)	1,047	1,913
Shareholders' Funds	1,664	2,175	1,576
Dividends2	105	132	114

* Northern Rock's year end is 31 December.
1 Net interest income plus fee and commission income commission expense.
2 Relates to ordinary dividends paid within the year.

Commentary

On 17 February 2008 the Chancellor of the Exchequer announced that the Government had decided to take Northern Rock into a period of TPO. The transfer of all Ordinary, Preference and Foundation shares to the Treasury Solicitor took place on 22 February 2008.

By the end of 2007 whilst outstanding residential mortgage balances had grown to £90.8bn, compared to £77.4bn at end 2006, retail deposit balances had fallen to £10.5bn, from £22.6bn at the end of 2006 and £24.4bn at the end of June 2007. In addition, there was a net outflow of wholesale funds of £11.7bn as maturing loans and deposits were not renewed.

As at 31 December 2007 and 31 March 2008 Northern Rock had borrowed £26.9bn and £24.1bn, respectively, from the Bank of England in order to meet its short term funding requirements. Northern Rock posted a pre-tax loss of £167.6m for 2007, against a pre-tax profit of £626.7m for 2006.

On 22 February 2008, following the transfer of Northern Rock to TPO, the following Non-Executives joined the Board: Stephen Hester, Philip Remnant and Tom Scholar. The following Executives also joined the Board on 22 February 2008: Ron Sandler and Ann Godbehere.

In addition, Andy Kuipers was appointed to the Board as Chief Executive on 19 December 2007, having first been appointed to the Board as an Executive Director in January 2005.