Putting - Newcastle Building Society... · welcome to the new members of the Board; Maxine Pott, Nigel Westwood and Colin Greaves. Both Maxine and Nigel were appointed to the Universal

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Newcastle Building Society

Newcastle Building Society

Puttingyou

ANNUAL REPORTAND ACCOUNTS2006

First

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Our Vision 3

Chairman’s Statement 2006 4

Chief Executive’s Review 2006 5

Our Directors 8

Directors’ Report 10

Report of the Directors on Corporate Governance 12

Remuneration Committee Report 14

Directors’ Responsibilities 16

Independent Auditors’ Report 17

Income Statements 18

Statement of Recognised Income and Expense 19

Balance Sheets 20

Cash Flow Statements 22

Notes to the Accounts 23

Annual Business Statement 62

CONTENTS Our visionWe aim to be a friendly, caring organisation that values customer loyalty, gives value for money and contributes

to the current and future well-being of the community. We recognise that our members and customers,

employees and the communities we serve all have a part to play in the future of the Society. We believe we can

best serve the interests of all three by remaining a strong, dynamic and independent mutual building society.

Our objectives for each are:

OUR MEMBERS AND CUSTOMERS

n To provide a range of innovative and competitively priced mortgage, savings and insurance products;

n To provide a secure home for savings;

n To be a customer focused organisation which understands its customers and listens to what they say;

n To offer expert advice on good value products across a range of services;

n To provide effective customer service in a prompt, courteous and efficient manner;

n To treat members fairly and in a way that is consistent with mutuality;

n To provide effective solutions by sharing our technology and innovation with our business partners and

n To treat our business partner customers with the same integrity and professionalism that we

treat our members.

OUR EMPLOYEES

n To provide secure and rewarding long-term employment;

n To respect our employees and endeavour to produce an environment of mutual trust and understanding and

n To provide better than average remuneration packages in return for better than average contributions.

OUR COMMUNITIES

n To be seen to be a major contributor to the economic well-being of the areas in which we operate and

n To support the communities in which we operate, by way of both personal and financial involvement.

CHIEF EXECUTIVE’S REVIEW 2006

In my new role as Chief Executive, it is particularly satisfying toannounce that, given the climate of fierce competition, significantchange and uncertain markets, the Newcastle has managed toachieve considerable growth. It gives me great pleasure to sharewith you the highlights of 2006 and my views for the next 12months.

This has been a notable year for the Newcastle. The organisationnow employs over 1,000 staff and the year has seen a significantgrowth of assets from £3.86 billion to £4.42 billion. As you know,the Newcastle and Universal Building Societies recently merged.By combining our resources, members now have access to astronger Society with more branches, more product choice anda larger dedicated team of people behind it.

On a broader scale, 2006 has been an interesting year with manytrials and opportunities. The predicted housing market collapsefailed to materialise, going instead from strength to strength. Thestock market was also buoyant with share prices reaching newhighs. Two recent rises in interest rates have not yet provided thebrake expected and rates have already increased further in 2007.

Universal merger As mentioned in the Chairman’s statement, the merger with theUniversal is great news for all concerned. I would like to thank allof you who voted with such an overwhelmingly positiveresponse. 98% of the Universal members voted to accept themerger and we received FSA approval in November 2006.Furthermore, I am delighted to report that all systems were fullytested prior to the merger and all new branches were ‘open forbusiness’ on 2 January 2007, using one integrated system.Great credit must go to the staff of both organisations for theirdrive and commitment to ensure everything was in place ontime.

The geographical and cultural fit of the two societies has enabledus to complete the merger with minimum of disruption and nostaff redundancies. The merger presents great opportunities forboth staff and members alike.

As a larger organisation, we are able to offer our memberseconomies of scale and wider distribution which will generatetangible benefits in terms of products and pricing. It will alsoenable us to provide an improved service to all our membersand the addition of four new branches, as a result of themerger, is a good example of this working in practice.

We remain committed to mutuality and the merger strengthensour position as the leading building society in the North East.

Member business In 2006, we continued with our strategy to focus on providingadvice to our customers. In the current environment there hasnever been a greater need for proper advice and we are in anideal position to give this to our customers.

Our strategy to become more customer focused has helped usto successfully develop products and services which meet theirspecific needs. These initiatives include tailored mortgageproducts like the First Time Buyer Mortgage and specialistsavings accounts, for example, the Newcastle 50+ SavingsAccount. The Society promoted this product using television andnational press for the first time in over six years, an approachwhich proved very successful and has helped attract many newmembers to the Society. We have also experienced considerableinterest in our Guaranteed Equity and Property Bond portfolioduring the course of the year.

Another exciting development to be introduced in 2007 is ournew Insurance partnership. General Insurance is a crucial areaof business for us and over the past 18 months, we have beendeveloping our expertise and presence in this area.

As part of this development, Newcastle Building Society will joinforces with Legal & General to offer a new home insuranceproduct and mortgage payment protection insurance. Travel andmotor insurance will also be available. By having one supplier forall our insurance and protection products we will be able tointroduce better a more streamlined service for our customers.

We continue to remain a major lender to the Social Housingsector. Our commercial lending operation grows from strength tostrength and throughout 2007 we will continue to provide highvalue loans to housing associations across the country.Associations play a crucial role in the provision of low-costhousing and it is appropriate that, as a building society, we helpthose who cannot afford to buy their own home.

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CHAIRMAN’S STATEMENT 2006

2006 was another challenging yet successful year for the Newcastle. We wereable to offer our members a range of exciting new products and services, whileour expanding outsourcing business established new partnerships with majorclients, including BMW Financial Services, Bristol & West and Icelandic bank,Landsbanki.

Last year also saw a number of changes to the Board of Directors.Robert Hollinshead resigned after almost ten years as ChiefExecutive, while James Heppell retired as Vice-Chairman,having served on the Board since 1980. Richard Allan alsoretired and Janet Towers, our former Operations Director,resigned from the Board as well. Their contribution to the Societyover the years has been immeasurable and I would like to placeon record my sincere thanks for all their efforts.

I would also like to take this opportunity to offer a very warmwelcome to the new members of the Board; Maxine Pott, NigelWestwood and Colin Greaves. Both Maxine and Nigel wereappointed to the Universal Board in 2000 and have joined theNewcastle Board of Directors following the merger. Colin Greaves,joined the Society in 1990 and was appointed to the Board in 2006as Operations Director.

As I noted at the 2006 AGM, I am delighted to announce theappointment of Colin Seccombe as the new Chief Executive.Colin has been Finance Director for the past eight years and hasbeen instrumental in many of the Society’s key successes overthat period. The Board and I have every confidence that Colin willcontinue to take the Society forward, building on the platform thatwe have established.

Indeed, Colin has already overseen the successful merger withfellow North East building society, Universal. The merger tookplace on 31 December 2006 and this was undoubtedly the mostsignificant development for the Society during 2006. Anoverwhelming 98% of Universal customers voted in favour of themerger demonstrating that this is a natural combination of twomutual societies. The move has cemented our position as theleading building society based in the North East. Our membersnow have access to more products, services and branches inour heartland area and there will also be greater careeropportunities for all our staff.

In his Chief Executive’s Review Colin will explain in more detailwhy the merger will be such a success and how our shared valueswith the Universal make it an ideal fit.

2006 has clearly been a year of change, but I am pleased toreport that the mutual principles upon which we build andexpand remain intact.

We are first and foremost here to serve the interests of ourmembers. Understanding our members and customers andlistening to what they say is crucial to our continuous improvement.This also supports our approach to Treating Customers Fairly (TCF).

All firms regulated by the FSA have to support one of its keyprinciples that a firm ‘must pay due regard to the interest of itscustomers and treat them fairly’. TCF is really important to theSociety because it lies at the heart of our customer focusedstrategy. I am delighted to report that we are well ahead of theFSA's timetable on this. Amongst other initiatives, we haveintroduced the development of a policy statement and customercharter which formally sets out our approach to dealing withcustomers.

A good example of this is our roadshow programme for members.Our Chief Executive, senior staff and at least one other memberof the Board normally attend the roadshows. They are extremelyvaluable to us and a number of the ideas that have been suggestedby the members attending them have been implemented withgreat success.

We have a proud record of investing in the local communitieswhere we have a branch. Throughout 2006 the Society hassupported locally based charities, providing £85,000 insponsorship donations and awards. We see this as an importantpart of being a mutual organisation and we will continue thisinvestment throughout 2007.

Our Strategic Solutions business, providing our core skills andservices to other organisations, continued to expand rapidly lastyear. A string of successful new partnership agreements helpedus win a highly prestigious Financial Sector Technology awardfor ‘Outsourcing Partnership of the Year’. In his Review, Colin willdiscuss further how progress in this division is benefiting theSociety as a whole.

All of our success is ultimately down to our staff. Without theirsupport and enthusiasm, we would not succeed in achieving ouraims. We consistently ask a great deal of them, particularly thisyear with our merger and expansion. I would like to express mygratitude for all they have done and I am sure that they will meet thechallenges of 2007 head on with their customary skill and energy.

With uncertain financial markets, pressure on margins andincreasing regulation, I am pleased to say we have once againturned in a very solid performance. I have every confidence thismomentum will continue into 2007 and believe we have thequality of staff and working practices in place to ensure thecontinued success for Newcastle Building Society.

CHRIS HILTON,CHAIRMAN

The year aheadThe environment in which we operate will not get any easier andwe fully expect the level of competition we face in our markets toincrease. Despite this, the Society remains extremely wellpositioned to deal with the challenges it will face. Evidence ofthis can be seen in some of our key financial indicators. Forexample, our credit rating, which is an independent evaluation ofour financial strength, remains strong. In addition, our solvencyremains healthy. As a result, I expect the Society to go fromstrength to strength.

A global bull share market is heralded, with suggestions that theFTSE 100 may reach a new high in 2007. Predictions for thehousing market foresee continued growth, although perhaps notat the pace of the last two years. This slowdown in pace will havefurther impact on the margins available through mainstreamlending, and as a result, we intend to focus on areas wheremargins are still available, even if this results in more modestasset growth levels.

Deloitte has predicted five further mergers in the building societysector in 2007 as competition increases. The increasedcompetition is good news for the Newcastle, providing as itdoes, additional opportunities to support smaller societiesthrough our Solutions business which will, in turn, enable us tofurther strengthen our position as the largest building society inthe North East.

In summary, we have achieved much to be proud of. Theseresults show that we are competing effectively in our targetmarkets and we finish the year in a very strong position. Not onlyhave we seen continued growth, but we have also undertakensubstantial infrastructure change which will enable us to offereven better products and services to our members and to providemore opportunities to our staff. We look forward to 2007 withmuch optimism.

COLIN SECCOMBE

CHIEF EXECUTIVE

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CHIEF EXECUTIVE’S REVIEW 2006 ContinuedCHIEF EXECUTIVE’S REVIEW 2006 Continued

Newcastle Lifetime MortgagesNewcastle Lifetime Mortgages was launched in early 2006 andsupports our advice led strategy by offering specialist advice tothose who would like to access the equity within their property.The rise in house prices means that, increasingly, people findthemselves considerably better off in terms of capital but unableto access their wealth. This initiative is proving a valuable sourceof advice which ensures that people obtain the most appropriateproduct for them.

Business solutions Our strategy to provide business solutions to other financialinstitutions has been extremely successful. During 2006, ourStrategic Solutions business has marketed, with success, to anumber of new customers. This has proved an exciting area ofgrowth for us and, to date, we manage over £6 billion of fundsfor others. New agreements with BMW Financial Services, Bristol& West and Icelandic bank, Landsbanki now complement ourexisting arrangements.

The success of our Solutions business is a great benefit to theSociety as a whole. The investment we have made in ourtechnology and systems allows us to provide others with thebenefits of our expertise while providing increasing economies ofscale to our own members. In recognition of the progress wehave made in this area, we are delighted to have been awardedthe title of ‘Outsourcing Partnership of the Year’ by FinancialSector Technology.

The Society continues to focus on innovative products and services.We were one of the first companies to enter the prepaid cardmarket in the UK towards the end of 2005 and have seenencouraging growth in this sector.

We are a principal member of MasterCard, which allows us toissue cards on behalf of a whole range of different organisations.These include First Prepay, which has a portfolio of prepaidcards including; talkSPORT Limited and lastminute.com Limited.We also issue gift cards to nine different shopping centres in theUK and Ireland. We produced our millionth card towards the endof the year and will continue to develop this market in 2007.

2006 has also seen continued development of our savingsaccounts designed for those people who manage funds on behalfof clients i.e. solicitors, pension trustees. The online facility enablesfunds to be transferred into and out of the account any time ofthe day quickly, efficiently and securely.

Working in the communityNewcastle Building Society continues to support the localcommunity through the Community Foundation, giving £85,000 ayear to worthy causes. Last year we supported communitygroups ranging from anti-bullying programmes in schools, tocentres offering IT and computer literacy courses for the over50s, and an initiative encouraging children from state schoolsand all ethnic backgrounds to play cricket.

Following the merger, the Society will honour key communityprojects set up by Universal Building Society, including SevenStories and the Centre for Children’s Books. Now in its final year,this three-year joint initiative between the Universal and Arts andBusiness is designed to bring the joy of story telling to children.

Staff Our staff are the most important factor in our success. I would liketo thank them for their enthusiasm and commitment. The Societyprides itself on being an Investor In People. It is our aim to developstaff to reach potential and with the merger, the opportunities forall our staff are increased.

During 2006, we strengthened our Executive management teamwith four new appointments. In addition, many members of staffachieved significant individual achievements. By way of illustration,Hazel Spence, Operational Risk Manager for the Society, set afine example when she gained the highest grade in the countryfor her Diploma in Anti-Money Laundering and obtained adistinction and an outstanding achievement award from the BritishBankers Association.

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OUR DIRECTORS OUR DIRECTORS Continued

Colin Seccombe, CHIEF EXECUTIVE joined NewcastleBuilding Society in 1997 as Finance Director and becameChief Executive in July 2006. Colin has also been a senioraudit partner with accountants KPMG. One of his first rolesas Chief Executive was to oversee the successful mergerwith Universal Building Society. Colin has a wide knowledgeof finance, and of working with other building societies andhigh profile organisations within the wider financial servicessector.

Olivia Grant, VICE-CHAIRMAN has served as a directorsince 1995 and brings with her a wide knowledge of thebusiness community in the North-East, and of the personnel,training and skills issues facing the Society today. She alsochairs the Pension Committee and the Pension Trustees.Olivia has numerous business and other interests, includingChairman of the Council of the University of Newcastle uponTyne, and is Chair of Culture North East Limited. Olivia isalso a director of HBI, which is an inventory company in thefield of Bioscience.

Tony Glenton is the Senior Partner in CharteredAccountants, Ryecroft Glenton. He has been a director for19 years, 6 of which as Chairman. He chairs the Society’sAudit Committee and, until recently, was Chairman of thePort of Tyne.

Colin Greaves joined Newcastle Building Society in 1990and was appointed to the Board in 2006 as OperationsDirector. Colin’s responsibilities cover InformationTechnology, Customer Service Operations and thedevelopment of the Strategic Solutions business.

David Holborn is former director for Lloyds TSB Northernregion. He is a Fellow of the Chartered Institute of FinancialServices and a past president of both the Bournemouth andNewcastle upon Tyne centres. He is also a trustee of RothleyTrust and chairs the Financial Risk and the RemunerationCommittees.

Wendy Lee was appointed to the Board in July 2004 asCommercial Director. Wendy was formerly with Legal &General where she was Sales Development Director,managing part of their independent financial adviserbusiness. Prior to this she was with Norwich Union for 15years.

Richard Mayland began a career in accountancy in 1974and was a partner with PricewaterhouseCoopers for 17 yearsbefore retiring in 2003. He is currently Chief Executive ofNorprime Limited and is a trustee of the Childrens’ HeartUnit Fund.

Maxine Pott was appointed to the Universal BuildingSociety Board in 2000, Maxine joined the Newcastle Boardfollowing the merger in December 2006 with the Universal.Maxine is a chartered accountant and partner in a regionalbusiness advisory group, RMT, where she advises a numberof businesses in the UK and abroad. She is also Treasurer ofthe North East and Cumbria German-British Chamber ofCommerce.

Nigel Westwood was appointed to the Universal BuildingSociety Board in 2000. Nigel joined the Newcastle Boardfollowing the merger in December 2006 with the Universal.He is a director of a regional chartered surveyors’ practicebased in Newcastle. He performs the duties of the Consulfor Norway.

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2Chris Hilton, CHAIRMAN is in his sixth year as Chairman

of Newcastle Building Society. He is a commercial lawyer

and senior partner at Eversheds in Newcastle, with specific

expertise in international trade and is adviser to a number

of companies in the UK and abroad. As well as being a

solicitor, Chris is a notary public, an arbitrator and a

mediator. He is also a member of the Council of the

University of Newcastle upon Tyne, for whom he is currently

leading a working party on corporate governance.

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FINANCIAL RISK MANAGEMENT

By their nature, the Group's activities are principally related to the useof financial instruments including derivatives. The Group acceptsdeposits from customers at both fixed and floating rates, and for variousperiods, and seeks to earn above average interest margins by investingthese funds in high-quality assets. This is achieved by consolidatingshort-term funds and lending for longer periods, at higher rates, whilstmaintaining sufficient liquidity to meet all claims that might fall due.

The financial risks faced by the Group include credit risk, liquidity riskand market (interest rate) risk which includes equity risk onguaranteed equity bonds. The Group has no exposure to foreigncurrency rate risk.

Credit riskCredit risk is the risk that counterparties will not be able to meet theirobligations as they fall due. The Financial Risk Committee is responsiblefor monitoring and, through the application of the Group’s lending andfinancial risk policies, approving the Group’s credit exposure. Thesepolicies not only address individual exposures but place limits on theamount of risk accepted in relation to one borrower or groups ofborrowers, and to geographical and industry segments. Concentrationrisk is monitored on a revolving basis and the limits are subject to anannual or more frequent review.

Liquidity riskThe Group’s liquidity policy is to maintain sufficient liquid resources tocover cash flow imbalances and fluctuations in funding, and enable theGroup to meet its financial obligations as and when they fall due. Thisis achieved by maintaining a prudent level of liquid assets, committedwholesale funding facilities and managed growth of the business.

Market riskThe net interest income and economic value of the Group is exposedto movements in interest rates. This exposure is managed on acontinuous basis, within limits set by the Board, using a combinationof on and off balance sheet derivatives. The Society is not permittedto trade in derivatives, so may only enter into such arrangements toreduce the risk to which it is otherwise exposed.

COMMUNITY

Charitable donations and political contributionsIn addition to providing considerable ‘in-kind’ support, the Society madefinancial donations to charities and grass roots community activitiesamounting to £85,000 (2005: £100,000). There were no politicalcontributions during the year.

Social HousingThe Society continues to be a major lender in the Social Housingsector which, in turn, helps those who cannot afford their own home.

Supplier payment policyThe Society’s policy regarding the payment of suppliers is to dischargesupplier invoices within the agreed payment terms when they fullyconform to the terms and conditions of the purchase. The Society willagree terms of payment with suppliers at the start of trading and willpay in accordance with the contractual and other legal obligations.The creditor days were 16 days (2005: 30 days).

TaxesDuring the year, we paid taxes in excess of £18.8 million (2005: £19.8million) on behalf of the Newcastle Group companies, its employeesand members.

STAFF

Newcastle Building Society is committed to equal opportunities foreveryone regardless of sex, race (including creed, colour, religion andethnic background) disability and marital status. Suitable training isgiven to disabled employees, including those who have becomedisabled during their employment, to ensure they have the same careerdevelopment opportunities as able-bodied staff.

Staff remuneration reviews are carried out on an annual basis and avariety of performance-related bonus schemes are in operation whichenable individual and branch team efforts to be recognised andrewarded.

We are committed to effective communication at all levels and takesteps to ensure that employee consultation is adequate and ongoing.Amicus has negotiating rights on behalf of all staff up to and includingsenior management level.

DIRECTORS

As at 31 December 2006, the members of the Board were:

AAE Glenton, MO Grant, C Greaves*, CJ Hilton, FD Holborn, W Lee*,RD Mayland, CJ Seccombe*.

All the above directors served throughout the year, with the exceptionof C Greaves, who was appointed on 26 May 2006.

JM Pott and NA Westwood were both appointed on 3 January 2007.

C Greaves, JM Pott and NA Westwood all retire under Rule 25 (4).

Under Rule 26 (1) AAE Glenton, MO Grant, CJ Hilton and CJ Seccomberetire at the Annual General Meeting. They are eligible and willing toserve on the Board for a further three years.

RB Allan and JW Heppell both retired on 20 April 2006.

RJ Hollinshead resigned on 30 June 2006 and JV Towers resigned on31 July 2006.*Executive directors

AUDITORS

A resolution to re-appoint PricewaterhouseCoopers LLP will beproposed at the Annual General Meeting.

ON BEHALF OF THE BOARD

CJ HILTON

8 MARCH 2007

DIRECTORS’ REPORT DIRECTORS’ REPORT Continued

The Directors have pleasure in presenting their Annual Report, together with theaudited Annual Accounts and Annual Business Statement of the NewcastleBuilding Society Group for the year ended 31 December 2006.

OBJECTIVES AND ACTIVITIES

The principal objective of Newcastle Building Society is to attractfunds, through a competitive range of personal savings andinvestment products, in order to make available advances securedon land and property, for use of our members.

This core activity is supported by offering a range of related financialproducts and services which are provided by the Society and itssubsidiary companies. The principal subsidiary companies whichaffect the net profits and net assets of the Group are listed in Note 14to the Accounts.

It is the intention of the directors that Newcastle Building Society willcontinue to remain an independent and mutual building society. Webelieve this status enables us to deliver consistent and fair value andto provide enhanced benefits to all our members and customersthrough our attractive, innovative products and our increasingnetwork of business partnerships.

DEVELOPMENT, PERFORMANCE AND FINANCIAL POSITION

The most significant development during the year crystallised on 31December 2006 when the Newcastle merged with our closeneighbour, the Universal Building Society. The Group’s balance sheetreflects the inclusion of Universal’s balance sheet at 31 December2006 but there is no impact on Newcastle’s reported results for theyear, other than the costs associated with the merger.

Business ReviewThe Chairman’s Statement and the Chief Executive’s Overview onpages 4 to 7 report on the activities during the year, post balancesheet events and likely future developments.

Highlights of and Key Performance Indicators for the year:

n Retail funding inflows increased by more than £200 millionduring the year and our 50+ Account continues to prove apopular choice for many of our customers.

n Group profit after tax amounted to £8.1 million, an increase of15.71% when compared to the previous year which, as apercentage of mean total assets, was 0.20% (2005: 0.19%).

n Our assets now stand at £4.42 billion. (2005: £3.86 billion).

n In 2006, management expenses as a percentage of mean totalassets was 81p per £100 of assets (2005: 76p per £100).

n The cost-to-income ratio in 2006 was 73.77%, increasing from65.53% in 2005, reflecting the investment in infrastructure on oursavings management business.

n The Society continued to promote its IT capabilities and corebusiness processing services to a range of new businesspartners. A number of major new contracts to provide fullymanaged Internet savings accounts to other financial institutionswhich included the Icelandic Bank, Landsbanki (under theIcesave banner) were tendered for and concluded during theyear, and these fully complement our existing and very successfularrangements with Bradford & Bingley and others. This hasresulted in a healthy increase in other income during the year andalso enables the Society to offer increased employmentopportunities both to its existing staff and to the local economygenerally.

n Despite repeated economic warnings about the increasing andnon-sustainable levels of personal debt in the UK, the creditquality of our lending book remains excellent with only 6properties in possession at the end of the year and only 0.34% ofour portfolio with arrears of more than 21/2 % of the balance. At 31December 2006 48 (2005: 45) mortgage accounts were twelve ormore months in arrears. The balances on these accountsamounted to £1.4 million (2005: £0.6 million) and the total amountof arrears in these cases was £0.2 million (2005: £0.1 million).

n Gross mortgage advances made during the year amounted to£693 million (2005: £684 million).

n At the year end, gross capital amounted to £276 million (2005:£238 million) which equates to a gross capital ratio of 7.01%(2005: 7.03%). Free capital was £246 million (2005: £212 million)being 6.26% (2005: 6.26%) of total shares and borrowings.

n Liquid assets, being cash and authorised securities but excludingliquidity balances held by special purpose securitisation vehicles,were £764 million representing 19.41% of shares andborrowings (compared to £639 million, 18.84% of shares andborrowings in 2005).

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4 REMUNERATION COMMITTEE

This Committee considers and makes recommendations on executiveemoluments and contracts of employment as well as on the level ofnon-executive fees and pension arrangements. Its report is includedon page 14.

The composition and attendance record of this Committee for2006 was:

All the Committee members are non-executive directors.

5 NOMINATIONS COMMITTEE

This advises on the structure of the Board, on nominations to it andthe re-election of Board members retiring by rotation. The Committeecomprises Chris Hilton, David Holborn, Tony Glenton, RichardMayland and Olivia Grant (all of whom are non-executive directors)and Colin Seccombe, Wendy Lee and Colin Greaves.

Non-executive directorsIn the opinion of the Board, each of its non-executive directors isindependent. Under the terms of the Code, one of the factors to betaken into account when assessing independence is length of service,particularly when this is in excess of nine years. Consequently, theindependence of two of the non-executive directors of the Societyrequires consideration.

Based upon the individual performance of each of these, and takinginto account the results of the annual appraisal system, the Board hasconcluded that in terms of independence of character, of judgementand, most important of all, of robustness of challenge to the Executiveof the Society, each of the directors affected may, unequivocally, beconsidered ‘independent’.

The directors are:Tony Glenton, who has served as a director for 19 years and wasChairman for six years between 1993 and 1998. He is a member ofthe Society’s pension scheme.

Olivia Grant, who has served as a director for 11 years and is amember of the Society’s pension scheme.

Both of these directors are standing for re-election at the 2007 AGM.The Board is also in the process of implementing a succession plan;progressively and without risking its effectiveness.

The Board believes that a senior independent director, who isavailable to shareholders, is inappropriate for an organisation whichdoes not have external shareholders. Members of the Society havethe opportunity to express their opinions to the Board at customerroad shows, through a member panel and a recently launchedfeedback forum on our Internet Site.

Appointments to the BoardThe appointment of new directors to the Board is considered by theNominations Committee (see above) which makes itsrecommendations to the Board.

All directors are subject to election by members at the AGM followingtheir appointment. This will be the case for Colin Greaves, NigelWestwood and Maxine Pott at the forthcoming AGM. In addition, alldirectors must receive approval from the FSA as an ‘Approved Person’in order to fulfil their controlled function as a director. Under theSociety’s rules, directors have to submit themselves for re-election atleast once every three years. New non-executive directors are usuallyexpected to serve two full three-year terms following their electionand, subject to their age and performance evaluation, may beproposed for a further term. Only in exceptional circumstances willnon-executive directors be able to seek re-election when they haveserved for more than nine years.

Auditors The Society has established a policy on the use of the external auditorsfor non-audit work which is considered and approved annually by theAudit Committee. The principal purpose of this policy is to ensure thecontinued independence and objectivity of the external auditors.

MEETINGS ELIGIBLEATTENDED TO ATTEND

James Heppell (Chairman to 20/04/06) 2 2

David Holborn (Chairman from 20/04/06) 4 4

Richard Allan 2 2

Tony Glenton 2 2

Richard Mayland 2 2

REPORT OF THE DIRECTORS ON CORPORATE GOVERNANCE REPORT OF THE DIRECTORS ON CORPORATE GOVERNANCE Continued

In discharging its responsibilities to be accountable to the Society’smembers for the operation of the Society, the Board regards goodcorporate governance as extremely important. In consequence, theSociety complies with the Code of Governance (the Code) containedin the Interim Prudential Sourcebook issued by the Financial ServicesAuthority (FSA).

Moreover, the Board acknowledges that it should seek whereverpossible to comply with the updated Combined Code published in2003. This is now effective for publicly quoted companies, but while itdoes not apply to building societies the Board looks to adopt thoseprinciples that are relevant to it. The Board believes it complies withall such provisions, except as noted below.

THE BOARD

The Board meets at least 11 times during the year, of which onemeeting is devoted specifically to a review of the Society’s strategy.The Board has responsibility for monitoring operational and financialperformance in pursuit of this strategy. It also approves annualbudgets, financial policy, risk management strategy and major capitalexpenditure, as well as the issue of full year and interim accounts.

The Board consists of seven non-executive and three executivedirectors. Each receives information and key performance indicatorsto ensure that the Board functions effectively. The Chairman ensuresthat the adequacy and relevance of this information is periodicallyreviewed.

The composition and attendance record of the Board for 2006 was:

There are five main committees of the Board.

1 AUDIT COMMITTEE

This Committee considers all audit matters relating to the Group, thesystem of internal control, financial reporting and the evaluation ofoperational risk. It receives reports from the Internal Audit functionand external auditors, and considers all prudential requirements.


All the committee members are non-executive directors.

2 FINANCIAL RISK COMMITTEE

This Committee meets to consider and make recommendations to theBoard on the level of credit, market and liquidity risk to which the Societyseeks to be exposed by virtue of its treasury and lending activities.It also assesses the Society’s insurance arrangements. All lendingand treasury policies are set by this Committee.


The Committee comprises three non-executive directors and oneexecutive director.

3 PENSION COMMITTEE

This Committee typically meets prior to the meeting of the PensionTrustees to consider and make recommendations on any issuesrelating to the Society’s pension schemes.


The Committee comprises two non-executive directors and oneexecutive director.


David Holborn (Chairman) 5 5

Chris Hilton 5 5

James Heppell 2 2

Robert Hollinshead - 3

Colin Seccombe 5 5

Olivia Grant 3 3


Tony Glenton (Chairman) 4 4

Richard Allan 1 1

Chris Hilton 3 4

Richard Mayland 4 4


Chris Hilton (Chairman) 12 12

Richard Allan 4 4

Olivia Grant (Vice-Chairman) 12 12

Tony Glenton 10 12

James Heppell 4 4

David Holborn 11 12

Robert Hollinshead 1 7

Wendy Lee 12 12

Richard Mayland 12 12

Colin Seccombe 12 12

Janet Towers 8 8

Colin Greaves 7 7

Maxine Pott - -

Nigel Westwood - -


Olivia Grant (Chairman) 5 5

Tony Glenton 5 5

Robert Hollinshead 1 2

Colin Seccombe 3 3

14 15

DIRECTORS’ EMOLUMENTS (Audited)

Emoluments of the Society’s directors from the Society and its subsidiary undertakings are detailed below:

Salary or Annual Benefits Increase in accrued 2006 2005Fees Bonus pension benefits Total Total

earned in year(excl. inflation)

£000 £000 £000 £000 £000 £000Executive directorsC Greaves (appointed 26 May 2006) 69 12 5 6 92 -RJ Hollinshead (resigned 30 June 2006) Note 1 264 - 32 5 301 275W Lee Note 2 122 22 121 2 267 164CJ Seccombe 183 36 13 14 246 163JV Towers (resigned 31 July 2006) 72 - 4 - 76 133

710 70 175 27 982 735Non-executive directorsCJ Hilton 58 - - - 58 57RB Allan (retired 20 April 2006) 12 - - - 12 29AAE Glenton 33 - - - 33 34MO Grant 37 - - 2 39 31JW Heppell (retired 20 April 2006) 15 - - - 15 35FD Holborn 35 - - - 35 34RD Mayland 30 - - - 30 13

930 70 175 29 1,204 968

Note 1Mr RJ Hollinshead resigned on 30 June 2006. He has a service contract terminable by the Society on one year’s notice and he will continue to receive cash and non-cashbenefits under the terms of his contract until 31 March 2007. These emoluments, which are subject to deduction of tax and national insurance, are included in the figures aboveand amount to £168,190.

Note 2The benefits of Ms W Lee include relocation expenses amounting to £108,320 which are subject to deduction of tax and national insurance.

Set out below are details of the pension benefits, including unfunded arrangements, payable on retirement, to which each of the directors isentitled at 31 December 2006. The accrued benefits include any benefits earned as an employee prior to becoming a director, as well asthose earned for qualifying services after becoming a director.

Total accrued Transfer value of Transfer value of Director’s Increase in benefits at accrued benefits accrued benefits contributions transfer value,31-Dec-06 at 31-Dec-06 at 31-Dec-05 during year less director’s

contributions£000 £000 £000 £000 £000

Executive directorsC Greaves (appointed 26 May 2006) 34 556 332 10 214RJ Hollinshead (resigned 30 June 2006) 90 1,474 946 20 508W Lee 5 53 17 11 25CJ Seccombe 32 544 236 16 292JV Towers (resigned 31 July 2006) 22 279 176 6 97

Non-executive directorsCJ Hilton 28 423 303 1 119RB Allan (retired 20 April 2006) - - - - -AAE Glenton 11 211 178 1 32MO Grant 8 124 71 3 50JW Heppell (retired 20 April 2006) 15 246 191 1 54FD Holborn - - - - -RD Mayland - - - - -

The accrued pension benefit shown is the amount that would be paid each year to the director in the form of a pension if he or she left at the endof the year. This pension is calculated based on the total period of service with the Society, both before and after becoming a director. The transfervalue has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11

REMUNERATION COMMITTEE REPORT

Having regard to the Combined Code on Corporate Governance2003, the remuneration committee consists solely of non-executivedirectors, currently FD Holborn (Chairman), AAE Glenton andRD Mayland and meets at least twice a year to consider and makerecommendations on the level of remuneration for executive andnon-executive members of the Board as well as the contractualarrangements for the executive directors. In its consideration ofremuneration levels and employment terms the committee takes intoaccount the following factors:

n Remuneration packages are set at a level to attract, motivate andretain executive directors of the calibre necessary to oversee theoperations of the Society. Basic salaries for executive directorsare reviewed annually by taking into account salary levels withinsimilar sized financial services organisations and the market as awhole, so as to attract and retain the skills levels that areappropriate to operate an organisation as complex as the Society.Basic salary levels also reflect the individual performance andresponsibility of each executive director.

n The executive directors are appraised annually by the ChiefExecutive; and in turn, he is appraised annually by the Chairman

n An annual performance-related bonus scheme has beenestablished for executive directors and senior executives. In anyone year a bonus is primarily determined based on theachievement of specific objectives that have been set in theSociety’s corporate plan. The maximum bonus is 25% of basicsalary and is non-pensionable.

n Executive directors, and three non-executive directors, aremembers of the Newcastle Building Society pension scheme,details of which are set out in Note 35 to the Society’s AnnualAccounts.

n The pensions are subject to a maximum of two-thirds of basicsalary. Where basic salary is in excess of the earnings cap as setout by the Inland Revenue rules, a provision is made for anunfunded scheme which produces a pension on that excess as ifthe cap did not apply. Life cover for a lump sum of four timesbasic salary on death in service and dependant’s pensions arealso provided.

n Executive directors receive a range of taxable benefits whichincludes a car or cash equivalent, private health care andconcessionary mortgage arrangements.

n The executive directors have service contracts which areterminable at any time by the Society on one year’s notice. Thereare no contracts for non-executive directors and nocompensatory terms for loss of office.

n Non-executive directors’ fees are set at a level appropriate toreflect the skills and time required to direct the Society’soperations and progress. Fees are reviewed annually in light ofthose paid to directors of other financial services organisationsand reflect individual involvement in board committees andsubsidiaries. Non-executive directors do not participate in anybonus scheme. The performance of the non-executive directors isreviewed by the Chairman annually and the performance of theChairman is reviewed by the non-executive directors, led by theVice-Chairman.

16 17

We have audited the Group and Society Annual Accounts of NewcastleBuilding Society for the year ended 31 December 2006, which comprisethe Group and Society Income Statement, the Group and SocietyStatements of Recognised Income and Expense, the Group andSociety Balance Sheets, the Group and Society Cash Flow Statementsand the related notes. These financial statements have been preparedunder the accounting policies set out therein. We have also auditedthe information in the Remuneration Committee Report that is describedas having been audited.

We have examined the Annual Business Statement (other than thedetails of Directors and Officers upon which we are not required toreport) and the Directors’ Report.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The Directors’ responsibilities for the preparation of the Annual Reportincluding the Annual Accounts, the Remuneration Committee Report,the Annual Business Statement and the Directors’ Report inaccordance with applicable law and International Financial ReportingStandards (IFRSs) as adopted by the European Union are set out inthe statement of Directors’ Responsibilities.

Our responsibility is to audit the Annual Accounts and the part of theRemuneration Committee Report to be audited in accordance withrelevant legal and regulatory requirements and International Standardson Auditing (UK and Ireland). This report, including the opinion, hasbeen prepared for, and only for, the Society’s Members as a body inaccordance with Section 78 of the Building Societies Act 1986 andfor no other purpose. We do not, in giving this opinion, accept orassume responsibility for any other purpose or to any other person towhom this report is shown or in to whose hands it may come savewhere expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the Annual Accounts andthe part of the Remuneration Committee Report to be audited havebeen properly prepared in accordance with the Building Societies Act1986, regulations made under it and Article 4 of the IAS Regulation.We also report to you our opinion as to whether certain informationincluded within the Annual Business Statement gives a truerepresentation of the matters in respect of which it is given, whetherthe information given in the Directors’ Report is consistent with theaccounting records and the Annual Accounts and whether the AnnualBusiness Statement and the Directors’ Report have been prepared inaccordance with the applicable requirements of the Building SocietiesAct 1986 and regulations made under it.

We also report to you if, in our opinion, the Annual Accounts are not inagreement with the accounting records, or we have not received all theinformation and explanations which we require for our audit.

We read the other information contained in the Annual Report andconsider whether it is consistent with the audited Annual Accounts.

We consider the implications for our report if we become aware of anyapparent misstatements or material inconsistencies with the AnnualAccounts, the Annual Business Statement or the Directors’ Report.Our Responsibilities do not extend to any other information.

BASIS OF AUDIT OPINION

We conducted our audit in accordance with International Standardson Auditing (UK and Ireland) issued by the Auditing Practices Board.An audit includes examination, on a test basis, of evidence relevant tothe amounts and disclosures in the Annual Accounts, the AnnualBusiness Statement and the part of the Remuneration CommitteeReport to be audited. It also includes an assessment of the significantestimates and judgements made by the Directors in the preparationof the Annual Accounts, and of whether the accounting policies areappropriate to the Group’s and Society’s circumstances, consistentlyapplied and adequately disclosed.

We planned and performed our audit so as to obtain all the informationand explanations which we considered necessary in order to provideus with sufficient evidence to give reasonable assurance that theAnnual Accounts and the part of the Remuneration Committee Reportto be audited are free from material misstatement, whether causedby fraud or other irregularity or error. In forming our opinion we alsoevaluated the overall adequacy of the presentation of information inthe Annual Accounts the part of the Remuneration Committee Reportto be audited.

OPINION

In our opinion:

n the Annual Accounts give a true and fair view, in accordance withIFRSs as adopted by the European Union, of the state of the Group’sand the Society’s affairs at 31 December 2006 and of the Group’sand the Society’s income and expenditure and cash flows for theyear then ended;

n the information given in the Annual Business Statement (other thanthe information upon which we are not required to report) gives atrue representation of the matters in respect of which it is given;

n the information given in the Directors’ Report is consistent withthe accounting records and the Annual Accounts and

n the Annual Accounts, the part of the Remuneration CommitteeReport to be audited, the Annual Business Statement and theDirectors’ Report have each been prepared in accordance withthe applicable requirements of the Building Societies Act 1986 ,regulations made under it and, as regards the Annual Accounts,Article 4 of the IAS Regulation.

PRICEWATERHOUSECOOPERS LLP

CHARTERED ACCOUNTANTS AND REGISTERED AUDITORS

NEWCASTLE UPON TYNE

8 MARCH 2007

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF NEWCASTLE BUILDING SOCIETYDIRECTORS’ RESPONSIBILITIES

DIRECTORS’ RESPONSIBILITIES FOR PREPARING THE ANNUAL ACCOUNTS

The following statement, which should be read in conjunction with the Statementof Auditors’ responsibilities on page 17 is made by the directors to explain theirresponsibilities for the preparation of the Annual Report and Accounts, AnnualBusiness Statement and Directors’ Report.

The Building Societies Act 1986 (‘the Act’) requires the directors to prepare Annual Accounts for each financial year which give a true and fair viewof:

n the Group’s and Society’s Income and Expenditure and Cash Flows for the year and

n the state of affairs of the Group and the Society as at the end of the financial year

In preparing the Accounts, the directors are required to:

n select appropriate accounting policies and apply them consistently;

n make judgements and estimates that are reasonable and prudent;

n state whether applicable accounting standards have been followed and

n prepare the Annual Accounts on the going concern basis.

In addition to the Accounts, the Act requires the directors to prepare, for each financial year, an Annual Business Statement and a Directors’ Report,each containing prescribed information relating to the business of the Society and its subsidiary undertakings. The Directors are also responsible forthe preparation of the Remuneration Committee Report.

DIRECTORS RESPONSIBILITIES IN RESPECT OF ACCOUNTING RECORDS AND INTERNAL CONTROLS

The directors are responsible for ensuring that the Society and its subsidiary undertakings:

n Keep accounting records in accordance with the Building Societies Act 1986 and

n Take reasonable care to establish, maintain, document and review such systems and controls as are appropriate to these businesses inaccordance with the rules made by the Financial Services Authority under the Financial Services and Markets Act 2000.

The effectiveness of these controls is closely monitored by senior management and reported to the Board, via the Audit Committee, on a regularbasis.

STATEMENT OF DISCLOSURE OF INFORMATION TO AUDITORS

So far as each director is aware, there is no relevant audit information of which the Society’s auditors are unaware.

Each director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information andto establish that the Society’s auditors are aware of that information.

ON BEHALF OF THE BOARDCJ HILTON

8 MARCH 2007

18 19

INCOME STATEMENTS for the year ended 31 December 2006 STATEMENT OF RECOGNISED INCOME AND EXPENSE for the year ended 31 December 2006

Note GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Interest receivable and similar income 2 194.1 188.4 186.1 177.5

Interest expense and similar charges 3 (161.2) (155.3) (153.7) (145.1)

Net interest income 32.9 33.1 32.4 32.4

Other income 4 14.2 12.4 11.7 9.4

Other charges 4 (1.7) (2.8) (2.0) (3.0)

Dividend income 5 - - - 1.9

Total operating income 45.4 42.7 42.1 40.7

Administrative expenses 6 (33.5) (28.0) (31.0) (26.3)

Impairment losses 13 (0.3) 0.1 (0.3) 0.1

Profit before taxation 11.6 14.8 10.8 14.5

Taxation 8 (3.5) (4.4) (3.2) (3.7)

Profit for the financial year from continuing operations 8.1 10.4 7.6 10.8

Discontinued operations 9 - (3.4) - (3.4)

Profit for the financial year 30 8.1 7.0 7.6 7.4


£m £m £m £m

Change in accounting policy on adoption of IAS 32 and IAS 39 - (5.6) - (5.6)

Actuarial gain / (loss) on retirement benefit obligations 0.4 (4.0) 0.4 (4.0)

Payments made to qualifying members and borrowers in respect of the merger (8.3) - (8.3) -

Transferred from investment property revaluation reserve on reclassifications of property 30 - 0.4 - 0.4

Taxation 18 2.3 1.8 2.3 1.8

Net expense recognised directly in reserves (5.6) (7.4) (5.6) (7.4)

Profit for the financial year 8.1 7.0 7.6 7.4

Total recognised income and expense since last annual accounts 2.5 (0.4) 2.0 -

The notes on pages 23 to 61 form part of these Accounts. The notes on pages 23 to 61 form part of these Accounts.

20 21

BALANCE SHEETS at 31 December 2006


£m £m £m £m

LIABILITIES

Due to customers - shares 21 2,671.5 2,060.3 2,671.5 2,060.3

Due to other customers 22 631.6 704.1 640.1 707.6

Deposits from banks 23 140.5 205.0 140.5 205.0

Debt securities in issue 24 619.7 579.8 494.1 419.5

Derivative financial instruments 12 14.6 33.1 13.9 29.5

Fair value adjustments for hedged risk 12 12.4 3.8 11.5 3.8

Other liabilities 25 43.0 17.6 43.3 15.8

Provisions 26 0.8 2.5 0.8 2.5

Retirement benefit obligations 35 8.8 15.6 8.8 15.6

Current tax liabilities 17 - 1.1 - 0.1

Deferred tax liabilities 18 2.7 2.2 1.7 1.3

Subordinated liabilities 27 60.7 49.7 60.7 49.7

Subscribed capital 28 19.9 19.9 19.9 19.9

Investment property revaluation reserve 29 - (0.1) - (0.1)

General reserve 30 195.3 168.8 190.1 164.1

TOTAL LIABILITIES 4,421.5 3,863.4 4,296.9 3,694.6

These Accounts were approved by the Board of Directors on 8 March 2007 and signed on its behalf by:

CJ HILTON, CHAIRMANMO GRANT, VICE-CHAIRMAN

CJ SECCOMBE, CHIEF EXECUTIVE

BALANCE SHEETS at 31 December 2006


£m £m £m £m

ASSETS

Cash and balances with the Bank of England 4.6 4.8 4.6 4.8

Loans and advances to banks 10 229.0 236.8 219.4 222.0

Other financial instruments at fair value through profit or loss 11 539.7 411.7 539.7 411.7

Derivative financial instruments 12 28.4 29.0 27.5 29.0

Fair value adjustments for hedged risk 12 12.4 29.8 11.9 26.2

Loans and advances to customers 13 3,542.2 3,076.6 3,415.6 2,929.3

Investment in subsidiaries 14 - - 16.8 6.3

Investment securities 0.1 10.3 0.1 10.3

Property, plant and equipment 15 27.0 23.7 16.9 13.2

Investment property 16 2.1 0.1 - 0.1

Current tax assets 17 2.5 - 2.8 -

Deferred tax assets 18 7.0 6.8 6.9 6.8

Other assets 19 26.0 31.6 34.2 32.7

Non-current assets held for sale 20 0.5 2.2 0.5 2.2

TOTAL ASSETS 4,421.5 3,863.4 4,296.9 3,694.6

The notes on pages 23 to 61 form part of these Accounts. The notes on pages 23 to 61 form part of these Accounts.

14 1522 23

NOTES TO THE ACCOUNTS for the year ended 31 December 2006

1 ACCOUNTING POLICIES

Basis of preparation The Accounts have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted for use in the EU.

Basis of consolidationThe Group Accounts include the results of the Society and its subsidiary undertakings, all of which have accounting periods ending 31 December.

Transfer of engagements The assets and liabilities taken on as a result of transfers of engagements from other building societies are incorporated at their book values tothe Group, adjusted for alignment of accounting policies, as at the date of transfer.

Securitisation transactionsIn accordance with IAS 39, where the Society has entered into securitisation transactions in which mortgages are transferred to special purposevehicles (SPVs), the Group continues to recognise securitised assets as loans and advances to customers. The Group does not own the equity ofthe SPVs created for these securitisations. However to comply with the Building Societies Act 1986 (International Accounting Standards and OtherAmendments) Order 2004 and Standing Interpretations Committee 12 (SIC 12), the SPVs are included as subsidiaries in the Group Accounts.

Financial assets The Group classifies its financial assets into the following categories:

Loans and receivablesThe Group’s mortgage assets and similar loans are classified as loans and receivables and measured at amortised cost using the effectiveinterest method (EIR). In accordance with EIR methodology, incremental up-front costs and fees receivable which are directly related to the loans(including administration and completion fees, arrangement fees, early redemption charges, procuration fees and commissions paid to agents)are deferred and released to income over the effective life of the mortgage assets.

Financial assets at fair value through profit or lossClassified as such when designated by management on initial recognition and permitted by IAS 39, these assets are recognised both initially andsubsequently at fair value with changes recognised in the Income Statement.

Available-for-saleThese assets are non-derivative financial instruments where the intention is to hold them for an indefinite period of time. They are initiallymeasured at fair value with subsequent movements recognised directly in equity.

Cash and cash equivalentsFor the purpose of the Cash Flow Statement, ‘Cash and cash equivalents’ comprises cash in hand and loans and advances to credit institutionsavailable on demand or with original maturities of three months or less i.e. highly liquid assets readily convertible into cash with an insignificantrisk of changes in value.

Impairment of financial assetsIndividual assessments are made against all those known loans and advances in arrears, in possession or where fraud has been identified.Based on these assessments, which consider such data as current valuation, time expected to sell the property and the amount ultimatelyexpected to be recoverable, those loans and advances that are considered to be impaired are reduced on an individual basis. Collectiveimpairment provisions are also made to reduce the value of those loans and advances where there has been some event such as a death ordivorce which will give rise to an impairment but of which we are not yet aware at the Balance Sheet date, with the result that the amountadvanced may not be recovered in full. For the purposes of the collective evaluation of impairment, financial assets are grouped on the basis ofsimilar credit risk characteristics.

Property, plant, equipment and depreciationOn transition to IFRSs, the Group elected to adopt the exemption in IFRS 1 which permits an entity to use a value, at the date of this transition,which is not depreciated cost, as the ‘deemed cost’ of the asset.

Property, plant and equipment are stated at cost (or ‘deemed cost’) less accumulated depreciation and any provisions for impairment. Land is notdepreciated.

Depreciation is provided at rates calculated to write down the assets to their estimated residual values over the course of their anticipated usefullives on the following bases:

Freehold buildings and leasehold buildingswith a residual lease term of greater than fifty years - 2% per annum, straight line

Other leasehold buildings - over the term of the lease

Refurbishment expenditure - 10% per annum, straight line

Equipment, fixtures and fittings - 10% per annum, straight line with effect from 1 January 2005

Computer equipment - 20% per annum, straight line

Motor vehicles - over the term of the lease, or if purchased, at 25% per annum, reducing balance

CASH FLOW STATEMENTS for the year ended 31 December 2006

The notes on pages 23 to 61 form part of these Accounts.


£m £m £m £m

Cash flows from operating activities 32 96.3 109.9 98.5 104.5

Taxation paid (1.1) (3.9) (0.3) (2.9)

Payment into defined benefit pension scheme (9.0) (4.5) (9.0) (4.5)

Dividend received - - - 1.9

Cash flows from investing activities

Purchase of property, plant and equipment (3.6) (2.2) (1.5) (2.2)

Sale of property, plant and equipment 2.5 0.2 2.5 0.2

Purchase of investment securities (1,096.0) (1,000.9) (1,096.0) (1,000.9)

Sale and maturity of investment securities 1,009.5 987.0 1,009.5 987.0

Net cash flows from investing activities (87.6) (15.9) (85.5) (15.9)

Cash flows from financing activities

Interest paid on subordinated liabilities (3.1) (3.3) (3.1) (3.1)

Interest paid on subscribed capital (2.3) (2.3) (2.3) (2.3)

Repayments under finance lease agreements (0.4) (0.3) (0.4) (0.3)

Net cash flows from financing activities (5.8) (5.9) (5.8) (5.7)

Net increase in cash (7.2) 79.7 (2.1) 77.4

Cash and cash equivalents at start of year 228.2 148.5 213.5 136.1

Cash and cash equivalents at end of year 32 221.0 228.2 211.4 213.5

14 1524 25


Investment propertiesInvestment properties are stated at their fair value at the Balance Sheet date. Movements on revaluation are charged directly to the Income Statement.

Non-current assets held for saleNon-current assets classified as held for sale are measured at the lower of carrying value and fair value less costs to sell. Non-current assets areclassified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use and where thesale is expected to complete within one year of the classification.

Lease purchase and leasingThe Group enters into lease purchase contracts and finance and operating leases. Assets held under lease purchase contracts and financeleases are capitalised in Property, plant and equipment at the fair value of the asset at the inception of the lease, with an equivalent liabilitycategorised under other liabilities. Assets are depreciated in accordance with the relevant Group policy. Finance charges are allocated toaccounting periods over the life of each lease on a straight line basis or using the sum of digits method, depending on the cash flows attaching tothe agreement. Rentals under operating leases are charged on a straight line basis over the lease term.

TaxationCorporation tax is charged on profits adjusted for tax purposes. Deferred tax is provided for, at current rates, on all temporary differences betweenthe carrying amounts of assets and liabilities and their tax bases.

Retained mortgage risk chargesThe Society charges certain borrowers a premium for its exposure to uninsured mortgage losses. This income is deferred and released to theIncome Statement on a level yield basis over the expected life of the mortgages.

Subordinated liabilities issue costsCosts associated with the issues of subordinated liabilities are accounted for as a deduction from the amount of the liability and are beingamortised over the life of the related debt.

Subscribed capital issue costsCosts associated with the first issue of permanent interest bearing shares have been treated as a financing cost of the Society’s Principal Officeand capitalised in the Accounts of the subsidiary undertaking which owns it. Costs associated with the second issue of permanent interestbearing shares are accounted for as a deduction from the amount of the liability and are being amortised over twenty five years.

Hedging instrumentsThe criteria required for an instrument to be classified as a hedge are that the transaction must be reasonably expected to match or eliminate asignificant proportion of the risk inherent in the assets, liabilities, other positions or cash flows being hedged and which results from potentialmovements in interest rates, equities or house price indices.

At the outset of the transaction, the Group documents the relationship between the hedging instrument and the hedged item or transaction, therisk management objective and strategy for undertaking the hedge, together with the nature of the risk being hedged. It also documents how thehedging instrument's effectiveness in offsetting the exposures to changes in the hedged item's fair value flows, attributable to the hedged risk, willbe assessed both at the inception of the hedge and on an ongoing basis.

In accordance with IAS 39, all derivatives are measured at fair value. When a derivative qualifies for hedge accounting i.e. there is an effectivehedge in place, the value of the hedged item is offset, with changes in the fair value going through the Income Statement.

Pension scheme costsThe Society operates both defined benefit and defined contribution schemes on behalf of directors and staff. The defined benefit schemes arefunded by contributions partly from the employees and partly from the Society at rates determined by independent actuaries. These contributionsare invested separately from the Group’s assets. Under IAS 19, the Scheme assets are measured at bid value at each Balance Sheet date andthe liabilities are measured using the projected unit valuation method, discounted using a corporate bond rate. The resulting pension schemesurplus or deficit is recognised immediately on the Balance Sheet and any resulting actuarial gains and losses are recognised immediately in theStatement of Recognised Income and Expense. For the defined contribution schemes, contributions are charged to the Income Statement, asthey become payable, in accordance with the rules of the Scheme.

ProvisionsA provision is recognised when there is a present obligation as a result of a past event, it is probable that the obligation will be settled and it can bereliably estimated.

2 INTEREST RECEIVABLE AND SIMILAR INCOME

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

On loans and advances to customers 163.6 159.6 154.8 147.5

On debt securities

- interest and other income 23.7 19.5 23.7 19.5

- profits net of losses on realisation 1.4 1.3 1.4 1.3

On other liquid assets

- interest and other income 7.6 10.9 7.8 11.1

Net expense on hedging assets (2.2) (2.9) (1.6) (1.9)

194.1 188.4 186.1 177.5

3 INTEREST EXPENSE AND SIMILAR CHARGES

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

On shares held by individuals 95.2 86.0 95.2 86.0

On subscribed capital 2.3 2.3 2.3 2.3

On deposits and other borrowings

- subordinated liabilities 3.2 3.3 3.1 3.1

- to subsidiary undertakings - - 0.1 0.2

- to other depositors and borrowers 60.4 69.3 52.9 59.1

Net income on hedging liabilities 0.1 (5.6) 0.1 (5.6)

161.2 155.3 153.7 145.1


14 1526 27

7 STAFF COSTS


£m £m £m £m

Wages and salaries 16.7 13.9 15.5 12.8

Social security costs 1.5 1.2 1.3 1.1

Pension costs

- defined benefit plans 0.8 0.8 0.8 0.8

- defined contribution plans 0.3 0.3 0.3 0.3

6 19.3 16.2 17.9 15.0

GROUP SOCIETY2006 2005 2006 2005

The average number of persons employed during the year was:

Full time 595 569 578 553

Part time 233 227 232 226

828 796 810 779

Principal Office 634 580 631 578

Branches 194 216 179 201

828 796 810 779


4 OTHER INCOME AND CHARGES

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £mOther incomeFee and commission income 7.5 9.5 5.2 6.6

Other operating income 6.7 2.9 6.5 2.8

14.2 12.4 11.7 9.4

Other charges

Fee and commission expense 1.8 2.4 2.1 2.6

Other operating expense (0.1) 0.4 (0.1) 0.4

1.7 2.8 2.0 3.0

5 DIVIDEND INCOMEGROUP SOCIETY

2006 2005 2006 2005£m £m £m £m

Received from subsidiary undertaking - - - 1.9

6 ADMINISTRATIVE EXPENSES


£m £m £m £m

Staff costs 19.3 18.1 17.9 16.9

2005 staff costs included in discontinued operations - (1.9) - (1.9)

7 19.3 16.2 17.9 15.0

Depreciation of property, plant and equipment 15 2.3 2.8 1.8 2.2

2005 depreciation included in discontinued operations - (0.7) - (0.7)

2.3 2.1 1.8 1.5

Rentals under operating leases for land and buildings

- payable to third parties 1.1 0.7 1.1 0.7

- payable to subsidiary company - - 0.1 0.1

Other administrative expenses 10.8 9.0 10.1 9.0

33.5 28.0 31.0 26.3

During the year the Group obtained the following services from the Group's auditors and these are included in other administrative expenses.

For:

Statutory audit 0.2 0.2 0.2 0.1


14 1528 29

9 DISCONTINUED OPERATIONS

During 2005, the closure of those branches outside the Society’s North East heartland qualified as a discontinued operation. Consequently, thepost tax results of this discontinued activity for 2005 were presented as a single line item of £3.4 million loss on the face of the Income Statement.This amount was made up as folllows:

GROUP and SOCIETY2006 2005

£m £m

Revenue - 1.3

Administrative expenses - (6.1)

Pre-tax loss from discontinued operations - (4.8)

Taxation - 1.4

Post-tax loss from discontinued operations - (3.4)

10 LOANS AND ADVANCES TO BANKS

Repayable from the date of the Balance Sheet in the ordinary course of business as follows:

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Accrued interest 1.1 1.4 1.1 1.3

On demand 12.2 24.7 2.6 10.0

In not more than three months 204.2 198.7 204.2 198.7

In more than three months but not more than one year 9.0 9.5 9.0 9.5

In more than one year but not more than five years 2.5 2.5 2.5 2.5

229.0 236.8 219.4 222.0


8 TAXATION

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Current tax

UK corporation tax at 30% (2005: 30%) on profits for the year 0.3 3.6 0.2 2.9

Group relief - - (0.2) -

Underprovision in respect of previous years (0.4) - (0.4) -

Total current tax (0.1) 3.6 (0.4) 2.9

Deferred tax

Current year 3.2 0.8 3.2 0.8

Overprovision in respect of previous years 0.4 - 0.4 -

Total deferred tax 3.6 0.8 3.6 0.8

Tax on profit on ordinary operations 3.5 4.4 3.2 3.7

Analysis of tax charge for the year

Profit on ordinary activities before tax 11.6 14.8 10.8 14.5

Profit on ordinary activities before taxation at the standard rate ofcorporation tax in the UK of 30% (2005: 30%) 3.5 4.4 3.2 4.4

Non-taxable income (0.3) - (0.3) (0.7)

Expenses not deductible for tax purposes 0.2 0.1 0.2 0.1

Pension cost relief in excess of pension cost charge (3.0) (0.5) (3.0) (0.5)

Capital allowances for year in excess of depreciation - (0.2) - (0.2)

Other short term timing differences (0.1) (0.2) (0.1) (0.2)

Underprovision in respect of previous years (0.4) - (0.4) -

Total current tax charge (0.1) 3.6 (0.4) 2.9

Factors affecting future tax charges

The Society and Group have unrelieved losses in respect of merger payments made to qualifying members and borrowers which are expected tomaterially affect future taxable profits.


14 1530 31

12 STRATEGY IN USING FINANCIAL INSTRUMENTS

The Group's activities are principally related to the use of financial instruments including derivatives.

The financial risks faced by the Group include credit risk, liquidity risk and market (interest rate) risk. The Group has no exposure to foreigncurrency risk.

The Group accepts deposits from customers at both fixed and floating rates, and for various periods, and seeks to earn above average interestmargins by investing these funds in high-quality assets. The Group seeks to increase these margins by consolidating short-term funds andlending for longer periods at higher rates, while maintaining sufficient liquidity to meet all claims that might fall due.

Credit riskCredit risk is the risk that counterparties will not be able to meet their obligations as they fall due. Impairment provisions are provided for lossesthat have been incurred at the balance sheet date. Significant changes in the economy, or in a particular industry segment that represents aconcentration in the Group's portfolio, could result in losses that are different from those provided for at the balance sheet date.

The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groupsof borrowers, and to geographical and industry segments. Concentration risk is monitored on a revolving basis and the limits are subject to anannual or more frequent review.

The Financial Risk Committee is responsible for monitoring and, through the application of the Group's lending and financial risk policies,approving the Group's credit exposure.

Exposure to credit risk is managed through regular analysis of the ability of the borrower to meet interest and capital repayment obligations andby obtaining collateral and, in some cases, additional forms of security such as personal guarantees.

The Group is also exposed to credit risk as a result of its use of derivatives. The Group maintains strict limits on the exposure of derivatives withcounterparties. At any one time, the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group(i.e. assets where their fair value is positive), which in relation to derivatives is only a small fraction of the contract, or notional values used toexpress their volume of instruments outstanding. This credit risk exposure is managed as part of the overall exposures to institutions andcustomers, together with potential exposures from market movements. Collateral or other security is often obtained for credit risk exposures onthese instruments, particularly for derivatives relating to structured products.

Geographical concentrationAll the activities of the Group are based predominantly in the UK.

Market riskMarket risk is defined as exposure to an adverse variation in costs or returns resulting from a change in market price or interest rate.

The Society faces the following major market risks in its balance sheet:

n the risk that the Society may suffer financial loss by having its interest income and interest expense priced on different bases or related todifferent repricing periods ('basis' risk);

n the risk that the Society will pay higher-than-market rates for its risk management instruments;

n the risk that incomplete or imperfect hedging results in residual risk and

n equity risk on guaranteed equity bonds.

NOTES TO THE ACCOUNTS for the year ended 31 December 2006NOTES TO THE ACCOUNTS for the year ended 31 December 2006

11 OTHER FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Transferable debt securities

Issued by public bodies - listed 18.0 3.5 18.0 3.5

Issued by other borrowers - unlisted 521.7 408.2 521.7 408.2

539.7 411.7 539.7 411.7

Debt securities have remaining maturities as follows:


In not more than one year 353.0 226.2 353.0 226.2

In more than one year 180.9 182.8 180.9 182.8

539.7 411.7 539.7 411.7

The directors consider that the primary purpose of holding securities is to comply with prudential requirements. All transferable debt securities areheld with the intention of use on a continuing basis in the Group's activities. They are designated by management on initial recognition as being atfair value through profit or loss and are recognised, both initially and subsequently, at fair value with changes recognised in the Income Statement.

14 1532 33

12 STRATEGY IN USING FINANCIAL INSTRUMENTS Continued

Cash flow and fair value interest rate riskCash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates.

The net interest income and economic value of the Group is exposed to movements in interest rates. This exposure is managed on a continuousbasis, within limits set by the board, using a combination of on and off balance sheet financial instruments. The tables below set out the interestrate sensitivity exposure after taking into account the various derivatives entered into by the Group. Items are allocated to time bands by referenceto the earlier of the next repricing date and the maturity date. Accrued interest is included in the ‘Up to 1 month' time band.


NOTES TO THE ACCOUNTS for the year ended 31 December 2006 NOTES TO THE ACCOUNTS for the year ended 31 December 2006

SOCIETY

At 31 December 2006Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Non interest

bearing Total£m £m £m £m £m £m £m

Assets

Cash and balances with the Bank of England 4.6 - - - - - 4.6

Loans and advances to banks 140.4 73.8 5.2 - - - 219.4

Fair value adjustments for hedged risk - - 0.4 4.0 7.5 - 11.9

Loans to customers 2,288.7 603.7 117.1 238.0 168.1 - 3,415.6

Other financial instruments at fair value through profit or loss 146.5 276.8 88.5 27.9 - - 539.7

Other assets - 6.7 - - - 99.0 105.7

Total assets 2,580.2 961.0 211.2 269.9 175.6 99.0 4,296.9

Liabilities

Due to customers - shares 2,075.3 355.0 129.8 110.5 0.8 - 2,671.4

Due to other customers 215.5 273.2 146.8 4.4 0.2 - 640.1


Deposits from banks 64.7 66.0 8.8 1.2 - - 140.7

Debt securities in issue 249.4 239.7 5.0 - - - 494.1

Other liabilities - - - - - 68.5 68.5

Total liabilities 2,604.9 933.9 290.9 122.3 5.8 68.5 4,026.3

Total interest sensitivity gap (24.7) 27.1 (79.7) 147.6 169.8

GROUP



Assets






Other assets - - - - - 93.6 93.6

Total assets 2,624.6 1,039.9 211.2 270.4 181.8 93.6 4,421.5

Liabilities







Total liabilities 2,596.4 1,059.5 290.9 122.7 6.3 69.9 4,145.7

Total interest sensitivity gap 28.2 (19.6) (79.7) 147.7 175.5

14 1534 35



GROUP



Assets



Fair value adjustments for hedged risk - 1.4 0.5 5.8 22.1 - 29.8



Other assets - 6.7 - 3.0 5.0 89.0 103.7

Total assets 2,183.7 1,062.5 114.1 230.0 184.1 89.0 3,863.4

Liabilities








Total interest sensitivity gap 145.0 133.9 (372.4) 133.8 181.1



SOCIETY



Assets



Fair value adjustments for hedged risk - 1.4 0.5 5.8 18.5 - 26.2



Other assets - 6.7 - 3.0 5.0 85.9 100.6

Total assets 2,137.9 946.2 114.1 230.0 180.5 85.9 3,694.6

Liabilities








Total interest sensitivity gap 97.1 176.5 (372.4) 133.8 177.5

Effective interest rateThe table below summarises the effective interest rate for monetary financial instruments not carried at fair value through the profit or loss:

2006 2005% %

Assets

Due from other banks 4.95 4.30

Loans and advances to customers 5.66 5.39

Liabilities

Due to customers - shares 4.70 4.18

Due to other customers 5.01 4.60

Due to other banks 5.09 4.66

Debt securities in issue 4.79 4.68

Assuming the financial assets and liabilities at 31 December 2006 were to remain to maturity or settlement without any action by the Group to alterthe resulting interest rate risk exposure, an immediate and sustained increase of 1% in market interest rates across all maturities would decreasenet income for the following year by approximately £0.8m.

Liquidity risk

The Group's liquidity policy is to maintain sufficient liquid resources to cover cash flow imbalances and fluctuations in funding, and enable theGroup to meet its financial obligations as and when they fall due. This is achieved through maintaining a prudent level of liquid assets, throughcommitted wholesale funding facilities and through managed control of growth of the business.

36 37



The table below analyses the Group's assets and liabilities into relevant maturity groupings based on the remaining period at the Balance Sheetdate to the contractual maturity date.

GROUP



Assets


Loans and advances to banks 146.0 71.5 9.0 2.5 - - 229.0


Derivative financial instruments - 0.5 10.4 11.1 6.4 - 28.4

Loans to customers 1.8 19.2 105.4 341.1 3,074.7 - 3,542.2

Other financial instruments at fair value through profit or loss 99.9 144.7 114.3 160.0 20.8 - 539.7

Other assets - - - - - 65.2 65.2

Total assets 252.3 235.9 239.5 519.2 3,109.4 65.2 4,421.5

Liabilities




Derivative financial instruments - - 0.6 5.8 8.2 - 14.6


Debt securities in issue 24.5 40.0 5.0 424.6 125.6 - 619.7



Net liquidity gap (2,181.0) (303.2) (102.7) (108.1) 2,961.0 9.9 275.9

At 31 December 2005Total assets 210.7 232.6 150.6 457.8 2,751.7 60.0 3,863.4Total liabilities 1,818.0 478.2 634.1 472.3 183.5 39.0 3,625.1




SOCIETY



Assets


Loans and advances to banks 136.4 71.5 9.0 2.5 - - 219.4


Derivative financial instruments - 0.5 10.4 10.7 5.9 - 27.5

Loans to customers 1.7 18.1 102.0 331.6 2,962.2 - 3,415.6

Other financial instruments at fair value through profit or loss 99.9 144.7 114.3 160.0 20.8 - 539.7

Other assets - - - 6.7 - 71.5 78.2

Total assets 242.6 234.8 236.1 515.5 2,996.4 71.5 4,296.9

Liabilities




Derivative financial instruments - - 0.6 5.3 8.0 - 13.9


Debt securities in issue 24.5 40.0 5.0 424.6 - - 494.1




At 31 December 2005Total assets 195.9 231.3 146.9 447.5 2,616.1 56.9 3,694.6Total liabilities 1,820.1 474.6 634.1 472.3 24.6 35.3 3,461.0


38 1539


The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the interest rate riskmanagement of the Group. It is unusual to be completely matched, as transacted business is often of uncertain term and of different types.An unmatched position potentially enhances profitability, but also increases the risk of losses.

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature are importantfactors in assessing the liquidity of the Group and its exposure to changes in interest rates.

Equity riskThe Group has no direct exposure to equity risk. The Group has a number of structured products which have an ‘embedded derivative’ attachedto them i.e. the return payable is derived from the performance of an underlying index/unit trust price/company share price. Under IAS 39 both theunderlying product and the derivative are fair valued through income and expense. The fair value amounts are approximately equal and offsettingso there is no material charge or credit in the financial statements.

Derivative financial instrumentsThe Group uses derivative instruments for hedging purposes only and is not permitted to use derivatives for trading purposes by the BuildingSocieties Act.

Interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of interest rates (forexample, fixed rate for floating rate). No exchange of principal takes place. The Group's approach to credit risk for derivatives is outlined above.

The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognised on the balance sheetbut do not necessarily indicate the Group's exposure to credit or price risks. The derivatives instruments become favourable (assets) orunfavourable (liabilities) as a result of fluctuations in market interest rates relative to their terms. The aggregate contractual or notional amount ofderivative financial instruments on hand, the extent to which instruments are favourable or unfavourable, and thus the aggregate fair values ofderivative financial assets and liabilities, can fluctuate significantly from time to time.

Structured products issued by the Group may be hedged with a single contract which incorporates both the underlying interest rate risk and theequity or house price index risk. The derivatives will match exactly the underlying liability risks.

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 BalanceSheet at their fair value.

GROUPCarrying value Fair value

2006 2005 2006 2005£m £m £m £m

Financial assets


Loans and advances to banks 229.0 236.8 229.3 239.6

Loans and advances to customers 3,542.2 3,076.6 3,570.5 3,140.0

Financial liabilities

Due to customers - shares 2,371.9 1,745.1 2,369.5 1,775.6

Due to other customers 631.6 704.1 631.7 704.2

Due to other banks 140.5 205.0 140.2 204.7

Debt securities in issue 619.7 579.8 621.2 580.5

SOCIETYCarrying value Fair value

2006 2005 2006 2005£m £m £m £m

Financial assets


Loans and advances to banks 219.4 222.0 219.6 224.7

Loans and advances to customers 3,415.6 2,929.3 3,444.3 2,984.4

Financial liabilities

Due to customers - shares 2,371.9 1,745.1 2,369.5 1,775.6

Due to other customers 640.1 707.6 639.3 707.7

Due to other banks 140.5 205.0 140.2 204.7

Debt securities in issue 494.1 419.5 495.4 420.2



a) Loans and advances to banksLoans and advances to banks includes inter-bank placements and items in the course of collection.The fair value of floating rate and overnight deposits is their carrying amount. The fair value of fixed interest bearing deposits is based ondiscounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity.

b) Loans and advances to customersLoans and advances to customers are net of provisions for impairment. The estimated fair value of loans and advances represents thediscounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates todetermine fair value.

c) Deposits due to other banksThe estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand.The estimated fair value of fixed interest-bearing deposits and other borrowings without market price is based on discounted cash flows usinginterest rates for new debts with similar remaining maturity.

d) Debt securities in issueThe aggregate fair values are calculated based on quoted market prices. For those notes where quoted market prices are not available, adiscounted cash flow model is used based on a current yield curve appropriate for the remaining term to maturity.

Derivatives held for hedgingDerivative financial instruments used by the Group have been described previously. The fair values of the derivative instruments held are set out below:

2006 2005Notional 2006 2006 Notional 2005 2005amount Assets Liabilities amount Assets Liabilities

£m £m £m £m £m £m

Fair value at 31 December

Interest rate swaps 1,971.2 19.7 (12.9) 1,782.6 28.8 (33.1)

Interest rate options 40.0 0.1 - 41.8 0.2 -

19.8 (12.9) 29.0 (33.1)


40 1541


13. LOANS AND ADVANCES TO CUSTOMERSGROUP SOCIETY

2006 2005 2006 2005£m £m £m £m

Loans fully secured on residential property 3,113.6 2,636.5 3,105.4 2,636.5

Loans fully secured on land 310.8 319.6 192.4 172.3

Other loans 121.6 123.6 121.6 123.6

Gross loans and advances 3,546.0 3,079.7 3,419.4 2,932.4

Less: allowance for losses on loans and advances (3.8) (3.1) (3.8) (3.1)

3,542.2 3,076.6 3,415.6 2,929.3

Loans and advances to customers have remaining maturities as follows:

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

On demand 5.5 3.6 5.5 3.6




In more than five years 3,047.8 2,706.9 2,935.3 2,574.8

3,546.0 3,079.7 3,419.4 2,932.4

Less: allowance for losses on loans and advances (3.8) (3.1) (3.8) (3.1)

3,542.2 3,076.6 3,415.6 2,929.3

Where a loan is repayable by installment, each such installment has been treated as a separate repayment in the maturity analysis set out above.The Group’s experience is that in many cases mortgages are redeemed before their scheduled maturity date. As a consequence, the maturityanalysis illustrated above may not reflect actual experience.

Allowance for losses on loans and advancesGROUP SOCIETY

2006 2005 2006 2005£m £m £m £m

Balance at 1 January 3.1 3.2 3.1 3.2

Taken on on transfer of engagements 0.4 - 0.4 -

Impairment losses on loans and advances 0.3 (0.1) 0.3 (0.1)

At 31 December 3.8 3.1 3.8 3.1

£1.6 million (2005: £1.5 million) of the above provision is regarded as being collective provisioning under FSA regulations.

14 INVESTMENTS IN SUBSIDIARY UNDERTAKINGS

SOCIETYShares Loans Total

£m £m £m

Investments in subsidiary undertakings

Cost

At 1 January 2006 7.8 2.1 9.9

Additions - 11.4 11.4

Repayments received - (0.9) (0.9)

At 31 December 2006 7.8 12.6 20.4

Provisions

At 1 January and 31 December 2006 1.8 1.8 3.6

Net book value at 31 December 2006 6.0 10.8 16.8

Net book value at 31 December 2005 6.0 0.3 6.3

The Society directly holds 100% of the issued ordinary share capital of all its subsidiary undertakings, having acquired the remaining 25%shareholding in Newton Facilities Management Limited on 21 December 2006.

Name of principal undertakings Principal activity

Kings Manor Properties Limited Residential property rental

NBS Mortgage Advisor Limited Provision of mortgage broking services

Newcastle Commercial Lending Limited Commercial lending

Newcastle Financial Services Limited Provision of financial services

Newcastle Mortgage Loans (Jersey) Limited Mortgage lending

Newcastle Mortgage Services Limited Provision of mortgage processing services

Newcastle Portland House Limited Commercial property rental

Newcastle Strategic Solutions Limited Provision of specialised products and services

Newton Facilities Management Limited Provision of managed IT services

Newton Facilities Computer Purchasing Limited Purchase, sale and leasing of IT equipment

Newton Facilities Computer Leasing Limited Leasing of IT equipment

All the above subsidiary undertakings, except for Newcastle Mortgage Loans (Jersey) Limited, which is incorporated and operates in Jersey, areincorporated in England and Wales and operate in Great Britain. A Group segmental analysis is not provided as in the opinion of the directors, theGroup's activities are predominantly UK based and within one business sector.

The results of the following securitisation vehicles are consolidated into the Group under International Accounting Standard 27: ‘Consolidated andseparate Financial Statements’.

Name Principal activity

Bamburgh Finance No. 1 PLC Securitisation vehicle

Bamburgh Holdings Limited Holding company

Bamburgh Mortgages Trustee Limited Securitisation vehicle

The Society has no shareholdings in any of the companies listed above. Bamburgh Finance No. 1 PLC is incorporated in England and Wales andoperates in Great Britain. The other companies are incorporated in Jersey.

42 1543


15 PROPERTY, PLANT AND EQUIPMENT

GROUP Leasehold Equipment, TotalFreehold land and fixtures,buildings buildings fittings and

motor vehicles£m £m £m £m

Cost

At 1 January 2006 6.2 11.4 12.0 29.6

Taken on on transfer of engagements 1.1 1.5 0.3 2.9

Additions - - 2.1 2.1

Disposals - - (0.4) (0.4)

Transferred from assets held for sale - 0.9 - 0.9

At 31 December 2006 7.3 13.8 14.0 35.1

Depreciation

At 1 January 2006 0.3 1.0 4.6 5.9

Charge for the year 0.1 0.2 2.0 2.3

Disposals - - (0.2) (0.2)


Reclassifications - 0.3 (0.3) -

At 31 December 2006 0.4 1.6 6.1 8.1

Net book value at 31 December 2006 6.9 12.2 7.9 27.0

GROUP Leasehold Equipment, TotalFreehold land and fixtures,buildings buildings fittings and


CostAt 1 January 2005 5.0 12.3 11.5 28.8


Transferred from investment property during the year 2.8 - - 2.8

Disposals - - (1.8) (1.8)

Transferred to assets held for sale (1.6) (0.9) - (2.5)

At 31 December 2005 6.2 11.4 12.0 29.6

DepreciationAt 1 January 2005 0.4 0.9 3.7 5.0

Charge for the year 0.1 0.2 2.5 2.8

Disposals - - (1.6) (1.6)


At 31 December 2005 0.3 1.0 4.6 5.9


15 PROPERTY, PLANT AND EQUIPMENT Continued

SOCIETY Leasehold Equipment, TotalFreehold land and fixtures,buildings buildings fittings and


Cost

At 1 January 2006 6.2 0.1 10.0 16.3

Taken on on transfer of engagements 1.1 1.5 0.3 2.9


Disposals - - (0.4) (0.4)


At 31 December 2006 7.3 2.5 11.9 21.7

Depreciation

At 1 January 2006 0.3 - 2.8 3.1

Charge for the year 0.1 - 1.7 1.8

Disposals - - (0.2) (0.2)


At 31 December 2006 0.4 0.1 4.3 4.8


SOCIETY Leasehold Equipment, TotalFreehold land and fixtures,buildings buildings fittings and


CostAt 1 January 2005 5.0 1.0 8.9 14.9


Transferred from investment property during the year 2.8 - - 2.8

Disposals - - (1.2) (1.2)


At 31 December 2005 6.2 0.1 10.0 16.3

DepreciationAt 1 January 2005 0.4 0.1 1.8 2.3

Charge for the year 0.1 - 2.1 2.2

Disposals - - (1.1) (1.1)


At 31 December 2005 0.3 - 2.8 3.1


44 1545


15 PROPERTY, PLANT AND EQUIPMENT Continued

Assets under finance leases, which comprise motor vehicles and a long leasehold property, have the following net book amounts.


£m £m

Cost

At 1 January 1.7 1.5

Accumulated depreciation (0.2) (0.3)

Net book amount at 31 December 1.5 1.2

16 INVESTMENT PROPERTY

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Fair value

At 1 January 0.1 3.0 0.1 3.0

Taken on on transfer of engagements 2.1 - - -

Disposals (0.1) (0.1) (0.1) (0.1)

Transferred to property, plant and equipment during the year - (2.8) - (2.8)

At 31 December 2.1 0.1 - 0.1

Investment properties are included at fair value, being directors’ valuation.

17 CURRENT TAX

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Current tax assets

Corporation tax debtor 2.5 - 2.8 -

Current tax liabilities - 1.1 - 0.1

18 DEFERRED TAX

Deferred tax is calculated on all temporary differences under the liability method using a tax rate of 30% (2005: 30%). The movement on thedeferred tax account is shown below.

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

At 1 January 4.6 3.5 5.5 4.4

Income Statement charge (3.2) (0.7) (3.2) (0.7)


Overprovision in respect of previous years (0.4) - (0.4) -

Charged to reserves 2.3 1.8 2.3 1.8

At 31 December 4.3 4.6 5.2 5.5

Deferred tax assets and liabilities are attributable to the following items.

Deferred tax assets

Short term timing differences 2.9 0.4 2.9 0.4

Retirement benefit obligations 2.6 4.6 2.6 4.6

Fair value adjustments on adoption of IAS 32 and IAS 39 1.3 1.7 1.3 1.7

Other assets 0.2 0.1 0.1 0.1

7.0 6.8 6.9 6.8

Deferred tax liabilities

Accelerated capital allowances (1.4) (1.3) (0.4) (0.4)

Pensions and other post retirement benefits (1.3) (0.9) (1.3) (0.9)

(2.7) (2.2) (1.7) (1.3)

The deferred tax charge in the Income Statement comprises the following temporary differences:

Accelerated capital allowances (0.1) 0.1 (0.1) 0.1

Short term timing differences (0.1) 0.1 (0.1) 0.1

Pensions and other post retirement benefits (3.0) 0.5 (3.0) 0.5

(3.2) 0.7 (3.2) 0.7

46 1547


19 OTHER ASSETS

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Group relief receivable - - 0.4 -

Other assets 7.2 14.8 7.9 8.4

Interest receivable on financial instruments 5.9 4.1 5.9 4.1

Other prepayments and accrued income 12.9 12.7 20.0 20.2

26.0 31.6 34.2 32.7

20 NON-CURRENT ASSETS HELD FOR SALE


£m £m

Cost

At 1 January 2.2 -

Taken on on transfer of engagements 0.2 -

Additions - 2.2

Disposals (1.1) -

Transferred to property, plant and equipment (0.8) -

At 31 December 0.5 2.2

These assets are primarily freehold premises vacant as a result of branch closures.

21 DUE TO CUSTOMERS - SHARES

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Held by individuals 2,670.7 2,059.3 2,670.7 2,059.3

Other shares 0.8 1.0 0.8 1.0

2,671.5 2,060.3 2,671.5 2,060.3



On demand 2,236.3 1,487.2 2,236.3 1,487.2




In more than five years 9.1 - 9.1 -

2,671.5 2,060.3 2,671.5 2,060.3

Included in the shares balance is the contractual balance of £286.3 million (2005: £292.8 million) of Guaranteed Equity Bonds with fair values at31 December 2006 of £299.6 million (2005: £315.1 million). The fair value adjustments of £13.3 million (2005: £22.3 million) to the carryingvalue of the bonds is included in the figures above.

All the changes in fair value are attributable to changes in benchmark equity and interest rates. The Society is contractually required to pay onlythe par value of the shares on maturity.

22 DUE TO OTHER CUSTOMERS

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Amounts owed to subsidiary undertakings - - 8.5 3.5

Other 631.6 704.1 631.6 704.1

631.6 704.1 640.1 707.6



On demand 25.9 18.6 25.9 18.6




In more than five years 0.2 - 0.2 -

631.6 704.1 640.1 707.6

23 DEPOSITS FROM BANKS

Repayable from the date of the Balance Sheet in the ordinary course of business as follows:GROUP SOCIETY

2006 2005 2006 2005£m £m £m £m





140.5 205.0 140.5 205.0

48 1549


24 DEBT SECURITIES IN ISSUE

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m


Certificates of deposit repayable in not more than one year 65.5 190.5 65.5 190.5

Medium Term Notes repayable in more than one year but not more than five years 424.6 224.8 424.6 224.8

Non recourse finance on securitised advances repayable after five years 125.6 158.9 - -

619.7 579.8 494.1 419.5

On 14 July 2005 the Society issued £225 million of floating rate Medium Term Notes. The notes are repayable on 29 July 2008.

GROUP2006 2005

Non recourse finance repayable after five years comprises: £m £m

Class A Mortgage backed floating rate notes due 2038 88.3 121.6

Class B Mortgage backed floating rate notes due 2038 13.6 13.6

Class C Mortgage backed floating rate notes due 2038 14.2 14.2

Class D Mortgage backed floating rate notes due 2038 9.5 9.5

125.6 158.9

The mortgage backed floating rate notes due 2038 (the ‘Notes’) are secured over a portfolio of mortgage loans secured by first charges overcommercial properties in the United Kingdom. Prior to redemption of the Notes on the final interest payment date falling in May 2038, the Noteswill be subject to mandatory and/or optional redemption in certain circumstances, on each interest payment date.

There are four classes of Notes. All classes are subject to interest based on the prevailing three month LIBOR plus an additional margin. The three month LIBOR is revised quarterly and the following margins, subject to revision, apply to the classes of Notes as follows:

Until 23 Feb 201122 Feb 2011 until Dec 2038

Class A 0.45% 0.90%

Class B 0.60% 1.20%

Class C 0.85% 1.70%

Class D 1.85% 2.85%

25 OTHER LIABILITIES

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Amounts payable to subsidiary undertakings - - 1.9 1.2

Income tax 7.7 2.7 7.7 2.7

Amounts payable to qualifying members and borrowers 14.8 - 14.8 -

Obligations under finance leases 1.5 1.2 1.5 1.2

Other creditors 2.3 5.6 7.9 2.7

Accruals and deferred income 16.7 8.1 9.5 8.0

43.0 17.6 43.3 15.8

Obligations under finance leases fall due as follows:

Within one year 0.2 0.2 0.2 0.2

In one to two years 0.2 0.1 0.2 0.1

In two to five years 0.3 0.1 0.3 0.1

In more than five years 0.8 0.8 0.8 0.8

1.5 1.2 1.5 1.2

These liabilities are secured by charges over the assets to which they relate.

26 PROVISIONS

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Provision for contingent liabilities and commitments 0.4 0.5 0.4 0.5

Provision for discontinued operations 0.4 2.0 0.4 2.0

0.8 2.5 0.8 2.5

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

Balance at 1 January 2.5 1.2 2.5 1.2

New provisions during the year 0.4 2.0 0.4 2.0

Amounts written off during the year (2.1) (0.7) (2.1) (0.7)

At 31 December 0.8 2.5 0.8 2.5

27 SUBORDINATED LIABILITIES

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

6.38% fixed rate subordinated notes 2015 10.9 - 10.9 -

6.19% fixed rate subordinated notes 2017 25.0 25.0 25.0 25.0

6.625% fixed rate subordinated notes 2019 25.0 25.0 25.0 25.0

Less: unamortised issue costs (0.2) (0.3) (0.2) (0.3)

60.7 49.7 60.7 49.7

On a winding up, the subordinated notes rank behind the claims against the Society of all depositors, creditors and investing members (otherthan holders of deferred shares i.e. permanent interest bearing shares) of the Society. The notes are repayable at the Society’s option and with theprior consent of the Financial Services Authority, on any interest date within five years of the maturity date.

50 1551


28 SUBSCRIBED CAPITAL

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

12.625% permanent interest bearing shares 10.0 10.0 10.0 10.0

10.750% permanent interest bearing shares 10.0 10.0 10.0 10.0

20.0 20.0 20.0 20.0

Less: unamortised issue costs (0.1) (0.1) (0.1) (0.1)

19.9 19.9 19.9 19.9

The subscribed capital was issued for an indeterminate period and is only repayable in the event of the winding up of the Society.

29 INVESTMENT PROPERTY REVALUATION RESERVE

GROUP SOCIETY2006 2005 2006 2005

£m £m £m £m

At 1 January (0.1) 0.3 (0.1) 0.3

Transferred to general reserve on disposals of property 0.1 (0.4) 0.1 (0.4)

At 31 December - (0.1) - (0.1)

30 GENERAL RESERVE

GROUP SOCIETYNote 2006 2005 2006 2005

£m £m £m £m

At 1 January 168.8 165.3 164.1 160.2

Taken on on transfer of engagements 31 24.0 - 24.0 -

Actuarial loss on retirement benefit obligations 0.4 (4.0) 0.4 (4.0)

Payments made to qualifying members and borrowers in respect of the merger (8.3) - (8.3) -

Transferred from investment property revaluation reserve on disposals of property - 0.4 - 0.4

Movement on deferred tax in respect of these items 2.3 0.1 2.3 0.1

Profit for the financial year 8.1 7.0 7.6 7.4

At 31 December 195.3 168.8 190.1 164.1

31 TRANSFER OF ENGAGEMENTS

On 31 December 2006, the Society merged with Universal Building Society. As part of this transaction, a payment was made to qualifying formermembers of the Universal Building Society amounting to £8.3 million, which is subject to deduction of Income Tax at the rate of 20%. The assetsand liabilities taken on and associated IFRS and other adjustments made to the amounts are stated below. These adjustments are necessary tobring Universal's accounts and accounting policies, which have previously been prepared under UK GAAP, into line with those of the Newcastle,which are prepared under IFRSs.

Book value Adjusted bookat date of value at date of

transfer Adjustments transfer£m £m £m

Liquid assets 116.8 (1.0) 115.8

Derivative financial instruments - 1.9 1.9

Loans and advances to customers 479.2 (0.3) 478.9

Fixed and other assets 8.6 1.1 9.7

604.6 1.7 606.3

Shares 405.0 - 405.0

Other borrowings 152.7 (1.0) 151.7

Derivative financial instruments - 1.8 1.8

Other liabilities 12.0 0.9 12.9

Subordinated liabilities 10.9 - 10.9

580.6 1.7 582.3

Reserves 24.0 - 24.0

604.6 1.7 606.3

52 1553


31 TRANSFER OF ENGAGEMENTS Continued

UNIVERSAL BUILDING SOCIETY: PRE-ACQUISITION RESULTS

GROUP INCOME AND EXPENDITURE ACCOUNT

For the period 1 January to 30 December 2006£m

Interest receivable and similar income 30.9

Interest expense and similar charges 24.0

Bonuses payable to qualifying members and borrowers (9.5)

Net interest payable (2.6)

Other income and charges 0.8

Administrative expenses (7.1)

Provisions for bad and doubtful debts (0.2)

Loss before taxation (9.1)

Taxation 2.5

Loss after taxation (6.6)

STATEMENT OF RECOGNISED GAINS AND LOSSES

For the period 1 January to 30 December 2006

Loss for the financial period (6.6)

Actuarial gain recognised in the pension scheme 0.3

Taxation (0.1)

Total losses recognised since last annual accounts (6.4)

32 CASH FLOW STATEMENTS

GROUP SOCIETY2006 2005 2006 2005

Reconciliation of operating profit to net cash inflow from operating activities £m £m £m £m

Continuing operations

Operating profit 11.6 14.8 10.8 12.6

Depreciation and amortisation 2.3 2.1 1.8 1.5

Interest on subordinated liabilities 3.1 3.3 3.1 3.1

Interest on subscribed capital 2.3 2.3 2.3 2.3

Increase in derivative financial instruments (2.0) (21.9) 1.5 (21.9)

Increase in other financial liabilities at fair value through profit or loss 9.9 22.3 6.4 22.3

Increase in retirement benefit obligations (0.5) (4.0) (0.5) (4.0)

Adjustment on adoption of IAS 32 and IAS 39 - (3.9) - (3.9)

Other non-cash movements (0.3) 0.3 (0.3) 0.5

Statement of Recognised Income: amounts taken on on transfer of engagements (15.7) - (15.7) -

Deferred tax on these movements (2.3) (1.8) (2.3) (1.8)

Net cash inflow before changes in operating assets and liabilities 8.4 13.5 7.1 10.7

Increase in loans and advances to customers (465.9) (241.1) (497.1) (288.5)

Increase in shares 611.2 89.1 611.2 89.1

Decrease in loans and advances to banks 0.5 13.0 0.5 13.0

(Decrease) / increase in amounts due to other customers and deposits from banks (171.6) 4.7 (131.9) 2.9

Increase in debt securities in issue 74.5 225.3 74.5 270.0

Increase in investment securities (10.2) (0.6) (10.2) (0.6)

(Increase) / decrease in other assets, prepayments and accrued income 23.4 (0.1) 16.3 3.9

Increase in other liabilities 15.1 8.2 17.2 6.1

Subordinated liabilities taken on on transfer of engagements 10.9 - 10.9 -

Net cash inflow from continuing operations 96.3 112.0 98.5 106.6

Discontinued operations

Operating loss - (4.8) - (4.8)

Depreciation - 0.7 - 0.7

Increase in provisions - 2.0 - 2.0

Net cash outflow from discontinued operations - (2.1) - (2.1)

Net cash inflow from operations 96.3 109.9 98.5 104.5

Cash and cash equivalents

Cash and cash balances with the Bank of England 4.6 4.8 4.6 4.8

Loans and advances to banks repayable on demand 11.6 24.7 2.0 10.0

Investment securities 128.7 198.7 128.7 198.7


At 31 December 221.0 228.2 211.4 213.5

Cash and cash equivalents under IFRSs comprise cash in hand and loans and advances to banks available on demand or with original maturitiesof three months or less i.e. highly liquid assets readily convertible into cash with an insignificant risk of changes in value.

54 1555


33 COMMITMENTS


£m £m

Irrevocable undrawn committed loan facilities 257.5 291.1

34 GUARANTEES, FINANCIAL COMMITMENTS AND CONTINGENT LIABILITIES

(i) Until 11 June 1996, under Section 22 of the Building Societies Act 1986, the Society had an obligation to discharge the liabilities of itssubsidiary undertakings insofar as they were unable to discharge the liabilities out of their own assets. Subsequently, the Society hasvoluntarily agreed to provide continued support to all of its subsidiary undertakings, insofar as any liabilities are not covered by legislation.

(ii) In common with other financial institutions, the Society has a contingent liability in respect of contributions to the Financial ServicesCompensation Scheme established under the Financial Services and Markets Act 2000. The Society has not been notified of any claimsagainst the scheme.

(iii) There were no capital commitments at either 31 December 2006 or 31 December 2005.

(iv) Operating lease commitmentsThe Group and Society are committed to the following payments under operating lease agreements in respect of land and buildings.


£m £m

Commitments which expire:

Within one year - 0.3

In one to five years 0.8 0.9

Over five years 6.5 9.6

7.3 10.8

35 RETIREMENT BENEFIT OBLIGATIONS

Pension schemes

As a result of the merger with Universal Building Society, the Group now operates two defined pension schemes, together with definedcontribution schemes. The principal funds are in the defined benefit schemes which pay out pensions at retirement based on service and finalpay. The first scheme is the Newcastle Building Society Pension and Assurance Scheme (NBS) and the second is the Universal Building SocietyPension and Assurance Scheme (UBS).

The Group has applied IAS 19 (Revised 2004) to this scheme and the following disclosures relate to this Standard. Any accumulated gains andlosses in each period are recognised in the Statement of Recognised Income and Expense.

Year ended Year ended Year ended31-Dec-06 31-Dec-05 31-Dec-04

NBS Scheme £m £m £m

The amounts recognised in the Balance Sheet are as follows:

Present value of pension obligation 57.3 54.4 44.8

Fair value of scheme assets (51.1) (38.8) (29.3)

Net pension liability 6.2 15.6 15.5

The amounts recognised in profit or loss are as follows:

Current service cost 0.9 0.8

Interest on obligation 2.7 2.4

Expected return on scheme assets (2.8) (2.0)

Total included in ‘employee benefits expense’ 0.8 1.2

Actual return on scheme assets 3.1 4.8

Changes in the present value of the defined benefit obligation are as follows:

Opening defined benefit obligation 54.4 44.8


Employee contributions 0.4 0.4

Interest cost 2.7 2.4

Actuarial gains - -

Benefits paid (0.9) (1.0)

Changes in assumptions (0.2) 7.0

Closing defined benefit obligation 57.3 54.4

Changes in the fair value of scheme assets:

Opening fair value of scheme assets 38.8 29.3

Expected return 2.8 2.0

Actuarial gains 0.3 2.8

Contributions by employer 9.7 5.3

Contributions by employee 0.4 0.4

Benefits paid (0.9) (1.0)

Closing fair value of scheme assets 51.1 38.8

56 1557


35 RETIREMENT BENEFIT OBLIGATIONS Continued

Pension schemes

The pension scheme assets include no assets from Newcastle Building Society's own financial instruments or property occupied by NewcastleBuilding Society, or other assets used by Newcastle Building Society.

The Society expects to contribute to the defined benefit pension scheme in the next financial year regular monthly contributions (inclusive ofexpenses and life assurance premiums) of 14.7% of pensionable earnings for 60ths members and 13.5% of pensionable earnings for 80thsmembers.

Year ended Year ended31-Dec-06 31-Dec-05

The major categories of Scheme assets as a percentageof total Scheme assets are as follows:

Equities 64.4% 54.9%

Fixed Interest Bonds 28.4% 36.1%

Index Linked Bonds 7.1% 9.0%

Cash 0.0% 0.0%

Principal actuarial assumptions at the Balance Sheet date (expressed as weighted averages):

Discount rate 5.2% 4.9%

Future salary increases 4.4% 4.4%

Future pension increases - pre 1 July 2000* 5.0% 5.0%

- post 30 June 2000 2.9% 2.9%

* On the excess over Guaranteed Minimum Pension

Mortality - current pensioners

Life expectancy at age 65:

Males 21.1 years 19.3 years

Females 24.0 years 22.3 years

Mortality - future pensioners

Life expectancy at age 65 (age 40 now):

Males 22.5 years 20.1 years

Females 25.3 years 23.1 years

No allowance has been made for commutation of pension for cash by members on retirement.

Where investments are held in bonds and cash, the expected long term rate of return is taken to be the yields generally prevailing on such assetsat the Balance Sheet date. A higher rate of return is expected on equity investments, which is based more on realistic future expectations than onthe returns that have been available historically. The overall expected long term rate of return on assets is then the average of these rates takinginto account the underlying asset portfolio of the pension plan.


The expected rates of return for each asset class, gross of scheme expenses, were:


Fixed Interest Bonds 5.35% 4.90%

Index Linked Bonds 4.75% 4.25%

Cash 4.50% 3.80%


Amounts for the current and previous three periods are as follows:

Year ended Year ended Year ended Year ended31-Dec-06 31-Dec-05 31-Dec-04 31-Dec-03

£m £m £m £m

Defined benefit obligation 57.3 54.4 44.8 40.2

Scheme assets (51.1) (38.8) (29.3) (26.1)

Deficit 6.2 15.6 15.5 14.1

Experience gains on plan liabilities 0.0 0.0 2.8 (0.1)

Experience gains on plan assets 0.3 2.8 0.6 1.3

Analysis of amount recognised in Statement of Recognised Income and Expense:


£m £m

Total amount of actuarial gains / (losses) recognised in the Statement ofRecognised Income and Expense in the year: 0.5 (4.2)

Cumulative amount of actuarial losses recognised in the Statement ofRecognised Income and Expense at the year end: (5.1) (5.6)

UBS Scheme

Year ended Year ended Year ended31-Dec-06 31-Dec-05 31-Dec-04

£m £m £m

The amounts recognised in the Balance Sheet are as follows:

Present value of pension obligation 8.8 8.0 6.2

Fair value of scheme assets (11.4) (10.7) (8.8)

Net pension liability (2.6) (2.7) (2.6)

The amounts recognised in profit or loss are as follows:


Interest on obligation 0.5 0.5

Expected return on scheme assets (0.5) (0.4)

Total included in 'employee benefits expense' 0.4 0.4

Actual return on scheme assets 0.3 0.8

Changes in the present value of the defined benefit obligation are as follows:

Opening defined benefit obligation 2.7 2.6


Contributions (0.3) (0.6)

Interest cost 0.1 0.1

Actuarial gains / (losses) (0.3) 0.3

Closing defined benefit obligation 2.6 2.7

58 1559

36 RELATED PARTIES

The Group is controlled by Newcastle Building Society. Further details of subsidiary undertakings are disclosed in Note 14 to these Accounts. Thedirectors are considered to be the only key management personnel as defined by IAS 24.

Transactions with directors and their close family members

Directors and their close family members have entered into the following transactions with Newcastle Building Society in the normal course of business.

Loans outstanding to directors and their close family members2006 2005£000 £000

At 31 December 1,631 2,238

These loans were made on normal commercial terms and a register of them is available for inspection at the Principal Office for a period of 15 daysup to and including the Annual General Meeting.

Deposits and investments held by directors and their close family members2006 2005£000 £000

At 31 December 250 969

Amounts deposited by directors and members of their close families earn interest on the same terms and conditions applicable to other customers.

Other transactionsMr CJ Hilton is a partner in Eversheds. Professional services amounting to £495,360 (2005: £64,013) were supplied by Eversheds to the Groupduring the year.

Mr CJ Seccombe is the treasurer of the MEA Trust which maintains a loan on commercial terms with the Society.



The pension scheme assets include no assets from Universal Building Society's own financial instruments or property occupied by UniversalBuilding Society, or other assets used by Universal Building Society.


The major categories of Scheme assets as a percentageof total Scheme assets are as follows:


Bonds 41.5% 20.5%

Other 2.4% 9.9%

Principal actuarial assumptions at the Balance Sheet date (expressed as weighted averages):

Discount rate 5.4% 4.7%

Future salary increases 4.4% 3.7%

Rate of increase in pensions in payment 2.9% 2.9%

Revaluation rate for deferred pensioners 3.0% 3.0%

Inflation assumptions 4.4% 2.9%


The expected rates of return for each asset class, gross of scheme expenses, were:


Bonds 4.90% 4.60%

Other 4.50% 4.50%

Amounts for the current and previous three periods are as follows:

Year ended Year ended Year ended Year ended31-Dec-06 31-Dec-05 31-Dec-04 31-Dec-03

£m £m £m £m

Defined benefit obligation 8.8 8.0 6.2 5.1

Scheme assets (11.4) (10.7) (8.8) (7.2)

Deficit (2.6) (2.7) (2.6) (2.1)

Experience gains on plan liabilities 0.3 0.8 0.2 0.5

Experience gains on plan assets 0.2 0.1 0.0 0.2

Analysis of amount recognised in Statement of Recognised Income and Expense:

Year ended Year ended

31-Dec-06 31-Dec-05

£m £m

Total amount of actuarial gains / (losses) recognised in the Statement ofRecognised Income and Expense in the year: 0.3 (0.3)

Cumulative amount of actuarial losses recognised in the Statement ofRecognised Income and Expense at the year end: (0.4) (0.7)

60 61

36 RELATED PARTIES Continued

Transactions with Group companiesThe Society undertook the following transactions with Group companies during the year.

Year ended 31 December 2006Interest Interest Rent Other Other amounts

paid received received amounts paid receivedto Society from Society from Society to Society from Society

£000 £000 £000 £000 £000

Newcastle Financial Services Limited - 16 - - -

Newcastle Mortgage Corporation Limited - - - - -

Newcastle Mortgage Loans (Jersey) Limited 161 - - - 8,209

Newcastle Portland House Limited - 123 66 - -

Newcastle Strategic Solutions Limited - - - 210 700

Newton Facilities Computer Leasing Limited - 3 - - 701

Newton Facilities Computer Purchasing Limited 26 - - - -

Newton Facilities Management Limited - 3 - 218 219

Year ended 31 December 2005Interest Interest Rent Other Other amounts

paid received received amounts paid receivedto Society from Society from Society to Society from Society

£000 £000 £000 £000 £000

Newcastle Mortgage Corporation Limited - 32 - 1,946 -

Newcastle Portland House Limited - 120 66 - -

Newcastle Strategic Solutions Limited - - - 105 700

Newton Facilities Computer Leasing Limited - 3 - - 845

Newton Facilities Computer Purchasing Limited 26 - - - -

Newton Facilities Management Limited - 3 - 168 132

At the year end the following unsecured balances were outstanding.

Amounts owed Amounts owed Amounts owed Amounts owedby Society to Society by Society to Society

2006 2006 2005 2005£000 £000 £000 £000

Adamscastle Limited - 1,320 - 1,320

Adamson Newcastle Limited 36 - 36 -

Kings Manor Properties Limited - 2,131 - -

NBS Financial Services Limited 81 149 81 149

Newcastle Developments Limited - 437 - 437

Newcastle Mortgage Corporation Limited 7 - 7 -

Newcastle Mortgage Loans (Jersey) Limited - 8,370 - -

Newcastle Mortgage Services Limited 5 - 5 -

Newcastle Portland House Limited 2,725 - 2,723 -

Newcastle Strategic Solutions Limited 1,610 - 1,120 -

Newcastle Financial Services Limited 233 - 263 -

Newton Facilities Management Limited 28 26 19 30

Newton Facilities Computer Leasing Limited - 2 - 57

Newton Facilities Computer Purchasing Limited - 301 - 439

Strachans (Newcastle) Limited - 5 - 5

NBS Mortgage Advisor Limited - 5 5 -


36 RELATED PARTIES Continued

Transactions with securitisation vehicles

Newcastle Building Society undertook the following transactions with securitisation vehicles during the year.

Interest paid Interest received Interest paid Interest receivedto Society from Society to Society from Society

2006 2006 2005 2005£000 £000 £000 £000

Bamburgh Finance No. 1 PLC 938 - 840 -

At the year end the following balances were outstanding with securitisation vehicles.

Loans owed Loans owed Loans owed Loans owedby Society to Society by Society to Society

2006 2006 2005 2005£000 £000 £000 £000

Bamburgh Finance No. 1 PLC - 10,548 - 10,978

156362

ANNUAL BUSINESS STATEMENT for the year ended 31 December 2006

DIRECTORS

Date of Birth Date of Appointment Occupation

CJ Hilton MA Chairman 19.01.50 01.01.78 SolicitorOther Directorships: Council Member of the University of Newcastle upon Tyne; Eversheds LLP; NEPIA Trust Company Limited;Newcastle Strategic Solutions Limited; Joint Company Secretary of Graig Shipping plc.

RB Allan MA FCA - 02.08.40 01.05.99 Chartered AccountantRetired 20/04/06 Other Directorships: Shelter Trading Limited; T & G Allan limited.

AAE Glenton CBE TD FCA DL - 21.03.43 20.11.87 Chartered AccountantOther Directorships: Percy Special Limited; Portland Financial Management Limited; Ryecroft Glenton Services Limited.

MO Grant BA (Hons) OBE FRSA DL Vice Chairman 16.08.46 22.05.95 Company Managing DirectorOther Directorships: Aroline Limited; Chair of Culture North East Limited; Dame Allan's Schools;Chairman of the Council Newcastle University; HB Innovations Limited.

C Greaves PG Dip, MSc - 21.08.55 26.05.06 Building Society ExecutiveOther Directorships: Newcastle Mortgage Services Limited, Newcastle Savings Management Limited, Newcastle Strategic SolutionsLimited, Newton Facilities Management Limited.

JW Heppell - 30.08.47 05.12.80 Company DirectorRetired 20/04/06 Other Directorships: Adamscastle Limited; Adamson Newcastle Limited; Bank of Newcastle Limited; Grainger Newcastle Properties Limited;

NBS Financial Services Limited; Newcastle Bank Limited; Newcastle Developments Limited; Newcastle Financial Services Limited; Newcastle Mortgage Corporation Limited; Newcastle Portland House Limited; Newcastle Savings Management Limited;Newcastle Strategic Solutions Limited; Newton Facilities Computer Leasing Limited; Newton Facilities Computer Purchasing Limited; Northumberland Golf Club Limited; Paramount Homes Limited; St. Cuthbert Newcastle Estates Limited; Strachans (Newcastle) Limited.

FD Holborn FCIB - 26.05.47 01.01.03 Former DirectorOther Directorships: Newcastle Commercial Lending Limited; Newcastle Portland House Limited.

RJ Hollinshead BSc (Hons) ACA ATII - 20.05.55 08.09.92 Building Society ExecutiveResigned 30/06/06 Other Directorships: Adamscastle Limited; Adamson Newcastle Limited; Bank of Newcastle Limited; NBS Financial Services Limited;

NBS Mortgage Advisor Limited; Newcastle Bank Limited; Newcastle Commercial Lending Limited; Newcastle Developments Limited; Newcastle Financial Services Limited; Newcastle Mortgage Corporation Limited; Newcastle Mortgage Loans (Jersey) Limited; Newcastle Mortgage Services Limited; Newcastle Portland House Limited; Newcastle Savings Management Limited;Newcastle Strategic Solutions Limited; Newton Facilities Computer Leasing Limited; Newton Facilities Computer Purchasing Limited; Newton Facilities Management Limited; Strachans (Newcastle) Limited; Tyne & Wear Play Association.

W Lee - 05.06.63 12.07.04 Building Society Executive

Other Directorships: Newcastle Financial Services Limited; Newcastle Mortgage Loans (Jersey) Limited.

RD Mayland FCA - 22.05.53 27.6.05 Company DirectorOther Directorships: NorPrime Limited.

JM Potts BA (Hons), FCA - 19.04.58 03.01.07 Chartered AccountantOther Directorships: None

CJ Seccombe BSc (Hons) FCA Chief Executive 28.10.52 01.09.97 Building Society ExecutiveOther Directorships: Adamscastle Limited; Adamson Newcastle Limited; Bamburgh Finance No. 1 PLC; Bamburgh Options Limited;Bank of Newcastle Limited; MEA Trust; NBS Financial Services Limited; NBS Mortgage Advisor Limited; Newcastle Bank Limited;Newcastle Commercial Lending Limited; Newcastle Developments Limited; Newcastle Financial Services Limited; NewcastleMortgage Corporation Limited; Newcastle Mortgage Loans (Jersey) Limited; Newcastle Mortgage Services Limited; NewcastlePortland House Limited; Newcastle Savings Management Limited; Newcastle Strategic Solutions Limited; Newton FacilitiesComputer Leasing Limited; Newton Facilities Computer Purchasing Limited; Newton Facilities Management Limited; Strachans(Newcastle) Limited; Tyne & Wear Play Association.

JV Towers BA ACA - 23.02.62 23.05.03 Building Society ExecutiveResigned 31/07/06 Other Directorships: None

NA Westwood R1FO, FRICS - 30.04.50 03.01.07 Chartered SurveyorOther Directorships: Sanderson Weatherall Limited, Sanderson Townend & Gilbert Limited.

OTHER OFFICERS

S Marks Building Society Executive, Director of Newcastle Financial Services Limited, NBS Mortgage Advisor Limited, Newcastle CommercialLending Limited.

L Todd LLB (Hons) Building Society Executive, Director of NBS Financial Services Limited; Newcastle Mortgage Corporation Limited;Newton Facilities Management Limited; Strachans (Newcastle) Limited; Adamscastle Limited; Adamson Newcastle Limited; Bank ofNewcastle Limited; Newcastle Bank Limited; Newcastle Developments Limited; Newcastle Facilities Computer Purchasing Limited;Newton Facilities Computer Leasing Limited.

SA Urwin BSc (Hons) Building Society Executive, Director of Newcastle Mortgage Loans (Jersey) Limited.

Documents marked ‘private and confidential’ may be served on the above named directors at the following address: Portland House, New Bridge Street, Newcastle Upon Tyne NE1 8AL.The executive directors have service contracts which are terminable at any time by the Society on one year’s notice. There are no contracts for non-executive directors and nocompensatory terms for loss of office.

2006 Statutory% %

1. Statutory percentagesLending limit 10.08 25.00Funding limit 32.16 50.00

The above percentages have been calculated in accordance with the provisions of the Building Societies Act 1986 as amended by the BuildingSocieties Act 1997.The statutory limits are as laid down under the Building Societies Act 1986, as amended by the Building Societies Act 1997, and ensure that theprincipal purpose of a building society is that of making loans which are fully secured on residential property and are funded substantially by itsmembers.

2. Other percentages

2006 2005% %

As a percentage of shares and borrowings:Gross capital 7.01 7.03Free capital 6.26 6.26Liquid assets 19.41 18.84

Profit for the year as a percentage of mean total assets 0.20 0.19

Management expenses as a percentage of mean total assets 0.81 0.76

The above percentages have been prepared from the Group Accounts.

Gross capital represents the general reserve together with the investment property revaluation reserve, subordinated liabilities and subscribed capital.

Free capital represents gross capital less property, plant and equipment, investment property and non-current assets held for sale.

Liquid assets are as shown in the Group Balance Sheet but exclude liquidity balances held in special purpose securitisation vehicles.

Shares and borrowings represent the total of shares, amounts owed to credit institutions, amounts owed to other customers and debt securities in issue.

Management expenses represent the aggregate of administrative expenses and depreciation.

Mean total assets are the average of the 2006 and 2005 total assets.

ANNUAL BUSINESS STATEMENT for the year ended 31 December 2006