LBS.L Regulatory News (LBS)

Leeds Building Society

Annual Report & Accounts

 2010

£84.5 million

£42.2 million

£7 billion

£984 million

£531 million

105 Albion Street, Leeds LS1 5ASTel: 0113 225 7777

Content

Chairman's Statement 2

Chief Executive's Review 4

The Board of Directors 6

Directors' Report 8

Corporate Governance Report 12

Directors' Remuneration Report 15

Directors' Responsibilities 17

Five Year Highlights 18

Independent Auditors' Report 19

Income Statements 20

Statements of Comprehensive Income 21

Statements of Financial Position 22

Statements of Changes inMembers' Interest 23

Statements of Cash Flows 24

Notes to the Accounts 25

Annual Business Statement 74

Where to find us 72

Directors

Robin A. Smith TD, LLB, DL (Chairman)

S. Rodger G. Booth, MA, DL (Vice Chairman)

Ian W. Ward FCIB (Chief Executive)

John N. Anderson QA CBE

Peter A. Hill, ACIB (Operations Director)

Carol M. Kavanagh, BA, MA

David Pickersgill, FCA (Deputy Chief Executive and Finance Director)

Les M. Platts, BA, FCA

Abhai Rajguru, BSC (Hons), ACMA

Kim Rebecchi, BA (Hons), FCIB (Sales and Marketing Director)

Ian Robertson, CA, CCMI

Robert W. Stott

Secretary

Andrew J. Greenwood, LLB

Chairman's Statement

For the year ended 31 December 2010

Leeds Building Society has delivered another strong financial performance in 2010 and I am, therefore, proud to present to members this year's Annual Report and Accounts.

Throughout the economic downturn, the Society has remained a successful member-owned business and we are once again reporting increased profitability and higher reserves. Despite the real potential for continuing economic difficulties, higher unemployment, rising arrears, lower house prices and falls in commercial property values, our prudent approach to lending and strict cost control enables us to compete effectively in our core markets of mortgages and savings. Indeed we are planning to increase our business volumes in 2011 and further details on this are given in the Chief Executive's Review.

The Society's assets at the year-end were £9.5bn, including £1.9bn of liquidity. Our reserves, which help protect our members from business and market shocks, have grown to a record level of £505m due to our continued good level of profitability. Our capital and reserves are well in excess of what is required by our regulator, the Financial Services Authority (FSA).

Our Markets

The savings market has remained very competitive throughout 2010, in part because many financial services organisations have sought to reduce their reliance on funding from the wholesale markets.

Against this background, we continued to attract savings balances at a level higher than our natural market share. Overall, our savings grew by £245m to £7bn. Indeed, since 2007, our strong performance has enabled us to fund all our residential lending from retail savings; the two core activities for which building societies were originally established.

As you may be aware from media comments, net lending across the entire UK market has fallen substantially from the levels seen prior to the credit crisis. However, your Society has continued with its strategy of prudent lending and yet has outperformed its natural market share for new loans. Residential mortgage lending increased by 7% to £984m and with mortgage redemptions of £962m, a similar level to 2009, there was a small increase of £22m in residential mortgages. We continue to develop a high quality, profitable mortgage portfolio and to assist people in achieving their aspirations of owning their own homes. We have made some progress in managing the run-off of our commercial loan book, which reduced in size by 6% to £576m.

Wholesale Funding

Market conditions for wholesale funding remained challenging during the year, particularly with respect to longer term funds. An issue in 2011 is the high level of Special Liquidity Scheme (SLS) maturities across the market, along with maturities of other Government guaranteed funds in both 2011 and 2012. The SLS was introduced by the Bank of England to improve liquidity in the market during the credit crisis and ends in 2012.

The wholesale funding markets have opened more widely to those financial institutions with strong credit ratings and Leeds Building Society is amongst this group. However, conditions remain unsettled, as evidenced by the problems in Greece and Ireland in 2010.

The Society was successful in raising £250m of 10 year funding in November 2010 through a covered bond issue. This was the first UK Sterling bond of this type backed by residential mortgages and the first Sterling issue of any type in the UK since June 2007. This initiative enables the Society to repay the majority of its SLS funding to the Bank of England earlier than had originally been planned.

The Society also raised a further £250m of wholesale funding during 2010, for periods of between three and five years. We have, as a consequence, now secured our long term funding requirement for 2011, which, combined with our strength in attracting retail savings, will enable us to increase our level of good quality residential mortgage lending in 2011 and beyond.

Our wholesale funding ratio has reduced from 22.6% to 20% and liquidity remained at 22%. Over 40% of our wholesale funding held at the end of 2010 was long term (more than one year in duration) giving further stability to our balance sheet.

Due to recent events in certain Eurozone countries, referred to previously, the Society has reduced its treasury exposure in Ireland, Spain and Portugal from £86m to £47m and with maturities this will reduce further in 2011.

Managing our Loan Portfolio

At the start of 2010, we expected residential arrears and provisions to increase, as the downturn in the UK economy impacted household budgets. However, our residential arrears (2.5% or more of outstanding mortgage balances) improved during the year to 2.16% compared to 2.24% at the end of 2009. The charge for residential losses was £15.4m compared to £12.2m in 2009.

Our commercial portfolio accounts for less than 8% of our total loan book. Commercial arrears (2.5% or more of outstanding mortgage balances) fell to 8.1% from 10.1% and the charge for commercial losses in the year was £28.2m, compared to £40.3m in 2009. Included in the 2010 losses was the write-off of an impaired loan where the Society provided subordinated debt. Balance sheet provisions at the end of the year were £34m.

The Society's total charge for losses for the year was £44.2m compared to £52.5m in 2009. Total balance sheet provisions against mortgages, liabilities and charges at the year-end rose to £70m from £66m at the end of 2009.

Profitability and Efficiency

The Society increased its net interest margin from 1.12% to 1.15% during the year, a good performance in the current competitive market. This has been achieved through closely managing the balance of contribution between our savers and borrowers, and offering a wide range of competitive mortgage and investment products.

We continue to focus on ensuring that members' money is employed efficiently within the business, which leads to a strong culture of cost control. This enabled us to have the best cost income ratio of any major building society in 2009 and we expect this to be maintained when the comparative data for 2010 is available. Our cost income ratio improved even further in 2010 from 36% to 34%. As a result of consistent earnings and maintaining good cost control, we have been able to deliver record operating profits of £84.5m (2009: £80.1m).

The Society had previously made a provision for an investment in Kaupthing, Singer and Friedlander. I am pleased to be able to report that we have disposed of the investment to a third party and this resulted in a £3m profit in the income statement.

Pre-tax profit rose to £42.2m, a 33% increase compared to 2009, reflecting both record operating profits and a lower provision charge.

The post-tax profit of £30.9m (2009: £22.6m) has been added to our reserves which now total a record £505m. The high level of reserves, which are classed as Tier 1 capital, enabled the Society to repay £39m of our £40m of subordinated debt. Our capital and reserves totaled £531m (2009: £543.1m) at the end of 2010, of which only 5% was in the form of remunerated capital, the lowest percentage of the larger building societies. The Society's Tier 1 capital ratio rose to 13.9% at the end of 2010, from 12.7% a year earlier, and remains significantly ahead of regulatory requirements.

Our Stakeholders

We continue to balance the needs of our members and staff, whilst developing the strong relationships we have with the regulator, the Bank of England, the media, industry trade bodies and credit rating agencies. The Society has the highest credit rating in the sector for bank financial strength awarded by Moody's, who commented on the Society's strong management of costs, good asset quality and solid funding structure. Fitch re-affirmed our key ratings in November 2010, stating that they 'reflect [the Society's] resilient revenue generation, excellent cost management and strong capital position'.

Board Composition and Remuneration

We strengthened our Board in 2010 with the appointment of Les Platts in October as a non-executive director. Mr Platts, a Chartered Accountant, spent 33 years with Deloitte, and brings a wealth of financial experience that will be invaluable in the highly regulated environment in which we operate. A summary of the key details of Les Platts, together with those of our Chief Executive, Ian Ward, and Vice Chairman, Rodger Booth, are included on page 7. These directors are all subject to election or reelection at the Annual General Meeting (AGM) that will be held on 29 March, 2011 at our new venue, the City Museum in the centre of Leeds, and I ask for your support for them.

In May 2010, the Society announced that Ian Ward would retire on 31 December, 2010 as Chief Executive and be succeeded by David Pickersgill, our current Deputy Chief Executive and Finance Director. Unfortunately, due to a prolonged period of ill health, David was not able to take up this appointment, but we are hopeful that his health will continue to improve and we wish him a speedy recovery. I am pleased to report that Ian Ward has agreed to remain as Chief Executive until his successor is in post. It is the Board's intention to make an appointment to succeed him in 2011 and, to facilitate this, an executive search firm has been engaged. The changes in leadership of the Society will present additional challenges during 2011.

The Board has appointed as Acting Finance Director, Gary Mitchell, a Chartered Accountant, who has worked for the Society for over 20 years, latterly as General Manager Finance & Risk, and has a wealth of experience in the building society sector.

Continued close scrutiny of executive performance, and measurement against testing criteria specified by the Board, have resulted in performance related awards being made this year to the senior executives and most staff. Details are contained in the Directors' Remuneration Report on pages 15 and 16.

"As a result of consistent earnings and maintaining good cost control, we have been able to deliver record operating profits of £84.5m..."

Summary

The Society has once again achieved a very strong set of results. My thanks go to our professional and dedicated staff who have worked tirelessly to achieve this excellent performance and deliver superior service to our members. The senior management team continues to lead the Society with confidence in challenging market conditions and I am also extremely grateful to them and to my non-executive Board colleagues.

In 2011, the Society will continue its prudent approach to lending, manage costs effectively and will develop attractive products for our members. The wealth of experience at the Society will be invaluable in delivering these objectives in the future. Our strong capital base and the continued funding of mortgages by retail savings will enable us to grow our business in 2011 and beyond.

Ian Ward will retire in 2011 after nearly 16 years as Chief Executive and, on behalf of my Board colleagues, I extend my warmest thanks to him for his enormous contribution. He has been highly successful in leading our Society, which, during his tenure, has almost quadrupled in size and has achieved profitability in every single year. We are now the UK's fifth largest building society. Ian's achievements were recently recognized when he won the Yorkshire Post Excellence in Business Individual Award. His outstanding leadership was commented on at the awards ceremony, as well as his calm stewardship through some very tough times in the financial markets. For me, it has been a privilege to work with an individual of such exceptional talent and integrity and I record my personal tribute to him.

Your Society is in extremely good health and I am confident that our sustainable business model places us in a very good position to grow and prosper. I would like to thank all our members for their continued invaluable support. Your Board and all the Society's staff continue to work on your behalf to ensure the Society has a successful, independent future.

Robin Smith

Chairman

21 February 2011

Chief Executive's Review

For the year ended 31 December 2010

2010 Business Highlights:

• Operating profit increased by 5% to a record £84.5m (£80.1m 2009).

• Pre-tax profit rose by 33% to £42.2m (£31.7m 2009).

• Savings balances grew by £245m to a record level of £7bn.

• New lending increased by 7% to £984m (£922m 2009).

• 52,000 new members attracted, taking total membership to a record 684,000.

• Efficiency improved even further in 2010 with cost income ratio reducing from 36% in 2009 to 34%, which was the most favourable of any major building society.

• Quality of lending remains good with the average loan to value (LTV) on 2010 advances being just 53%.

• Wholesale funding ratio reduced to 20% (23% 2009).

Leeds Building Society has performed very strongly in 2010, with record operating profits, higher savings balances, over 52,000 new members and almost £1bn of new mortgage lending. Our already high level of reserves has risen even further. This has been achieved in the context of continuing challenges for the financial services sector in attracting both retail and wholesale funding, combined with a UK mortgage market that has seen little growth in recent years.

Savings

Retail savings remain at the heart of our business. We achieved an above plan performance by offering a competitive product range supported by our qualified, trained and friendly staff, who ensure our members access the advice they need to achieve the best out of their savings. The lowest interest rates on record have continued to make conditions difficult for those who rely on their savings for income. We aim to deliver a wide choice of accounts to help our members in the current climate and maximise their tax efficiency.

The Society attracted over £2bn of new savings, resulting in a net increase in balances of £245m, taking our overall total to £7bn. This was a very good result in 2010 as this rise was more than twice our natural market share. We continued to build on our success of the previous year by providing good quality products to members. These included our popular ISA accounts which saw an increase in balances of 13% on top of the 30% achieved in 2009. Our fixed term bonds also performed strongly as we continued to offer an element of penalty free access, a feature that is not commonly available on this type of product.

During 2010, we were able to attract 52,000 new members, taking our total to more than 684,000. Our Member Loyalty Bond was again very popular and I am pleased that we are offering another exclusive account for our loyal customers.

We gained recognition for the quality of our products at the prestigious 2010 Moneyfacts awards when we achieved the accolade of both 'best notice' and 'best no notice' account provider. This further demonstrates our commitment to providing excellent value and choice for our customers.

Mortgage Lending

From our strong financial position, we have been able to increase gross residential lending in 2010 to £984m compared to £922m in 2009. This has been achieved in the context of the overall UK mortgage market which experienced a reduction of £7.5bn in new lending compared to 2009. The Society's gross lending was almost £250m above our natural market share but our prudent approach on new mortgages delivered an average loan to value (LTV) of 53% on loans taken out during the year.

Over recent years, we have achieved a balanced lending portfolio through a mix of business which, in 2010, included 8% on shared ownership loans and 12% on buy-to-let mortgages. Shared ownership enables people to purchase a property, usually in conjunction with a housing association, and is particularly suited to first time buyers. We are also keen to support new and existing members looking for a mortgage, either to buy or to refinance a property. We have specialist advisers in branches and also a dedicated mortgage unit where staff are available to speak to applicants from 8am to 8pm, seven days a week. The telephone number to call is 08450 505 062.

New challenges will face us in 2011, particularly potential regulatory changes which may be implemented as a result of the Mortgage Market Review. We shall continue to monitor market developments closely and are confident that we shall deal effectively with any new requirements.

Whilst our new residential loans in 2010 totalled £984m, the Society received repayments from residential mortgage customers of £962m, which, therefore, resulted in a small overall increase in balances of £22m. The amount outstanding on commercial loans reduced in 2010 by £37m to a total of £576m. We did not make any new commercial loans during the year.

Other Income

Other income is an important part of the Society's earnings and in 2010 this increased by 10% to £21.3m. During the year, our Leeds Financial Services subsidiary, which sells investment products provided by Aviva and Credit Suisse, celebrated its tenth anniversary and saw income rise to £9m from £8.4m in 2009, the fifth consecutive year of increase. This was achieved through improvements to the product range and by delivering high levels of customer service and financial advice.

Our general insurance activities, which provide cover for our members' homes and protection for their mortgage payments if they become ill or unemployed, achieved income of £5.5m (£5.6m in 2009) with home insurance sales increasing by 15%. These insurances are provided by Aviva, with which we have recently negotiated a new contract, delivering improved benefits for our members and the Society.

We reviewed our credit card arrangements during the year and are now offering a Leeds Building Society VISA branded card, in conjunction with MBNA, Europe's largest credit card provider. Full details of the card's benefits, which include a 0.50% cashback on purchases, can be obtained by visiting any of our 65 UK branches or our website at www.leedsbuildingsociety.co.uk.

Customer Service and Fairness

As a member-owned business, treating customers fairly and delivering excellent customer service underpin our objectives and mission statement.

Independent monthly surveys are conducted to assess the level of customer satisfaction and I am very pleased to report that we have seen a further increase in satisfaction levels, which averaged 95% in 2010. We also use these surveys for comparison purposes and these show that we consistently outperform our competitors across a wide range of service measures.

We are committed to operating through various distribution channels to ensure that our members are able to contact us by their preferred method. All of our customer contact points are continually reviewed to ensure they deliver first class service in a cost efficient way. For instance, service standards at our Call Centre (open 12 hours a day, seven days per week) have improved with an average speed of answer of only 14 seconds. Customer feedback is important in helping us identify areas where our service can be improved so please feel free to contact the Society if there are any issues you would like to raise. When customer comments or complaints are received, we have robust processes in place to ensure that they are fully considered, with responses provided quickly and fairly. We continue to invest in our branch network with refurbishments at six branches in 2010 and further locations identified for improvements in 2011.

Our commitment to customer service was further demonstrated when the Society was voted best regional branch network by Your Money, a leading consumer magazine. This award is only given following a rigorous judging process, which included many mystery shopping exercises undertaken at our branches by Your Money. The award is testament to the hard work carried out by our professional, friendly branch staff.

Corporate and Social Responsibility

Our charitable and community projects continue to be very important to us and we are particularly proud that Leeds Building Society Charitable Foundation has now made donations of over £1m since it was established in 1999. During these 11 years, it has supported many worthy causes, resulting in over 1,200 individual donations.

In addition to the above, we support Marie Curie, Age UK, Save the Children, Help for Heroes, World Wildlife Fund, the British Heart Foundation and St. George's Crypt. The total amount donated to these charities in 2010 was over £70,000. This sum is generated from our Caring Saver account (which pays 1% of the average balance held over the year), as well as the donations from votes at the Society's AGM and the 'Your Interest ...In Theirs' scheme, which is the pence value of the interest paid to investors during the year. If you wish to do this with your savings account, you can register for the scheme by simply contacting your local branch or telephoning our Call Centre on 0113 225 7777 and they will provide you with the necessary information.

Our staff also undertake activities in their own time to raise money for charity. In 2010, our employees have been involved in bungee jumps, a dragon boat race and numerous auctions and raffles. Altogether, they have raised over £25,000 for charitable causes.

The Society has also focused on environmental issues and, in June, we installed the first rooftop beehive in Yorkshire at our Leeds Head Office. In addition, we were very proud to receive the Mortgage Finance Gazette 2011 Best Ecological / Green Award, with the judges highlighting initiatives designed to reduce paper usage, minimise power consumption and increase the level of recycling. The Society was also the first building society, and one of only 13 financial services organizations nationally, to be awarded the Carbon Trust Standard in July 2010, for the reduction in carbon emissions at our Head Office.

We have continued to develop our sporting affinities, including being the main sponsor of the successful Leeds Rhinos rugby league team. We also support a number of other football and rugby clubs including Leeds United, Doncaster Rovers, Bradford City and Huddersfield Giants. These initiatives, which include youth development projects, increase the brand awareness of the Society.

Our staff are vital to the success of the Society and we continue to be an 'Investor in People' with the regular surveys under this initiative confirming the strong satisfaction ratings amongst our employees. We encourage all staff to make us aware of any comments or opinions they have, so that they can be considered as part of our future plans.

Outlook

The economic climate remains uncertain, with the possibility of falls in residential and commercial property values, potential declines in household income and more financial services regulation. Unemployment is likely to rise further and this could impact on levels of arrears and repossessions, particularly when interest rates increase from their current low levels.

However, our continued ability to improve our capital and reserves through good levels of profitability leaves us in a strong position to grow our business in the coming years. As a result, we intend to increase new residential mortage lending by at least 25% in 2011 but will ensure this is underpinned by sound underwriting.

Being able to achieve our lending aspirations will depend on generating adequate funding, either retail or wholesale, which may prove challenging given the continued market uncertainty.

Summary

We shall continue to monitor developments in the market and remain confident that the Society has the skills, experience and financial strength to deal with any challenges that arise.

Our ongoing success has been achieved through the dedication and professionalism of the Society's staff who have worked very hard to deliver these good results. I would like to thank all of my colleagues for their substantial contributions during the year.

The Chairman has outlined the situation regarding my successor in his Statement and that I have agreed to remain as Chief Executive until the successful candidate is in post. This will be during 2011, after which time I shall retire. During my 15 years here, the Society has been very successful, thanks to a high quality team of directors, management and staff, and I am grateful to them all. I would also like to thank our members for their continued loyalty. I know I shall miss the day-to-day excitement of my role but I shall be following very closely the future success of our Society. We have a superb business and I am very confident that we will continue to be a highly successful independent building society.

Ian Ward

Chief Executive

21 February 2011

Robin Smith (68)

I joined the Board in 1998 and became Chairman in March 2007. Shortly thereafter the financial crisis began and it has been a privilege to chair a Board of committed and experienced directors as we responded successfully to the challenges presented. I practised as a solicitor, ultimately becoming senior partner of my firm (now DLA Piper). I am a non-executive director of Bartlett Group (Holdings) Ltd. and of the Yorkshire County Cricket Club. I maintain my links with the Territorial Army and with a number of local and national charities.

Ian Ward (61)

I joined the Society in 1995 as Chief Executive following a successful career in banking and building societies. I am a member of the Council of the Building Societies Association. Despite the very challenging economic environment, it is very satisfying that the Society has continued to provide competitive products and high quality service to members. I am married to Gill and have two sons and our family home is in Yorkshire. Outside of work, I have a keen interest in sport and enjoy watching the Leeds Rhinos rugby league team who the Society has successfully sponsored since 2007.

John Anderson (65)

I joined the Board in 2006 as a result of the merger between Leeds Building Society and the Mercantile Building Society, of which I was Chairman. I am a great believer in mutuality and I am delighted to have joined a Board which is totally committed to mutual status. I hold several public/private partnership directorships and I am Chairman of City Hospitals Sunderland Foundation Trust. In my spare time I am a keen follower of cricket, being an honorary life member of Durham County Cricket Club.

Rodger Booth (67)

I was asked to join the Board at the end of 2000. After training in the computer industry as a systems analyst, my main career has been in the printing industry, latterly as Chief Executive and Chairman of Bemrose Corporation. For the Society, I currently specialise in the areas of remuneration and pensions. I am an enthusiastic watcher and participant of sport, particularly cricket and golf. I believe strongly in the real and sustained benefits which mutuality can provide for members.

Peter Hill (49)

I joined the Society in 2001, and the Board as Operations Director in August 2006. I am responsible for the smooth running of the Society's Head Office customer service units, IT and Property. As a chartered banker, I have over 30 years' experience in the Financial Services industry. My interests outside work revolve around my family, having two sons. I am also a keen golfer. I believe that the Society is best able to meet the needs of its membership by delivering outstanding customer service and remaining independent.

Carol Kavanagh (48)

I joined the Board in 2005 and I am currently a member of the Society's Remuneration Committee. I believe that my 25 years' business experience provides value to customers and staff alike. I hold another position as Executive Group HR Director for Travis Perkins plc. I am a firm supporter of the benefits of mutuality and believe that this is the key to the continuing success of the Society and a major differentiator in the wider financial services sector. Outside work I devote most of my spare time to my family.

David Pickersgill (57)

I joined the Society in 1986 and was appointed to the Board in 1995. I am the Deputy Chief Executive and Finance Director and I am very proud to work for a successful independent building society. A Chartered Accountant by profession, my working life has been in accountancy and building societies. Outside work, I am a Trustee of Smartrisk Foundation UK and a member of the Court of the University of Leeds. I am also a keen supporter of sport and particularly enjoy watching football, rugby and cricket.

Les Platts (57)

I joined the Board in 2010 and I am a member of the Credit and Remuneration Committees. I am a Chartered Accountant and was the Senior Partner for Deloitte in their Leeds office. The Society, with its proud history and firm commitment to mutuality, is a very strong part of the Leeds business community. I am also a director of a pensions administration business. I am married with two children and outside of work I support the NSPCC. I am also a keen follower of cricket, football and rugby.

Abhai Rajguru (45)

I joined the Board in 2008 having spent my career in the financial services sector. I hold a number of directorships including a private equity firm and a hospital trust. I serve on the Society's Audit, Assets & Liabilities and Group Risk Committees. I am proud to be a member of the Board of the Society, which, as a mutual, has remained focused on delivering value to its members. Much of my time outside work is taken up by my young son, and I also enjoy music, films and motorsports.

Kim Rebecchi (44)

I joined the Board in December 2009, having worked for the Society since 1988. I am Chairman and Director of our successful subsidiary company, Leeds Financial Services Ltd. Being Leeds born and bred, it is an honour to be on the Board of the only mutually owned financial services organisation with its Head Office in Leeds. Outside work, I enjoy cooking for family and friends, walking in the beautiful Yorkshire countryside and reading.

Ian Robertson (63)

I joined the Board in 2008 and am a member of the Audit, Group Risk and Credit Committees. I was delighted to join such a highly regarded local institution and to work with the Society in further enhancing its reputation as a leading example of the benefits of mutuality. I was President of the Institute of Chartered Accountants of Scotland in 2004/5 and I am currently Chairman of the Audit Advisory Board of the Scottish Parliament Corporate Body and a Director of the Homes and Communities Agency for England. Outside work, I am a keen reader and love music.

Bob Stott (67)

I was appointed to the Board in 2008, following my retirement as a director of Wm Morrison Supermarkets plc. I currently serve on the Society's Audit, Assets & Liabilities and Remuneration Committees. I hold three other directorships and I am also a Trustee of the YCCC Charitable Youth Trust. Mutuality for me means that our endeavours can be focused entirely on our members, and I intend to play my part in keeping it this way. Outside work I enjoy spending time with my family and I follow most team sports.

"Your Board and all the Society's staff continue to work on your behalf to ensure the Society has a successful, independent future."

Statement of the Society and its subsidiaries ('the Group') for the year ended 31 December 2010.

Business Objectivesand Future Developments

The Group's main objective is to provide existing and new members with residential mortgages and retail savings products. In support of the main objective, the Group seeks to deliver quality customer service, cost efficiency and competitive products, returning value to members whilst preserving financial strength.

The Group's business and future plans are reviewed in more detail by the Chairman and Chief Executive on pages 2 to 5.

Performance for the Year

The performance and development of the Society is measured by reference to a range of performance indicators. For 2010, the key performance indicators were as follows:

Post-tax profit as a percentage of mean total assets

The post tax profit ratio was 0.32% (0.23% in 2009). The pre-tax profit of the Group increased by 33% to £42.2m compared with £31.7m in 2009.

Change in total assets

Total assets were £9.5bn at the end of the year, which was the same as at the end of 2009. Mortgage balances also remained at a similar level to the 2009 position. Mortgage advances were £1.0bn, compared to £0.9bn in 2009. Liquid assets were £1.9bn, representing a ratio of 22% of shares and borrowings. The Directors consider that the level of liquidity is generally appropriate to the activities of the Group.

Growth in share balances to members

During the year, member share balances increased by £245m, to £7.0bn (2009: £225m to £6.8bn), an increase of 4% from the end of 2009.

Management expenses ratios

Management expenses were £44.3m, a slight reduction from 2009's level of £44.4m. The management expense ratio (management expenses as a percentage of mean total assets) increased to 0.47% from 0.45% in 2009. Management expenses as a percentage of total income improved to 34%, from 36%, in 2009. Net costs (management expenses less non interest income) as a percentage of mean assets reduced to 0.26%, from 0.30%.

Capital strength

At 31 December 2010, gross capital, represented by general and other reserves, revaluation reserves, subordinated liabilities and subscribed capital, amounted to £540m. This was 6.2% (2009: 6.3%) of shares and borrowings, which the Directors consider is appropriate to the activities of the Group. Free capital, represented by gross capital together with the collective loss provision, less tangible fixed assets and investment properties, amounted to £526m, 6.0% (2009: 6.1%) of shares and borrowings. The reduction in the gross and free capital ratios reflects the buy back of £39.1m of the £40m subordinated debt during 2010. Overall, the capital ratios reflect the continued financial strength of the Group.

Other performance measures

Net interest income reduced by £0.7m to £109.1m from £109.8m in 2009, with a net interest margin of 1.15% (1.12% in 2009).

Non interest income increased to £19.7m, compared to £14.7m in 2009, mainly as a result of the impact, in 2009, of fair value losses from derivative financial instruments.

The impairment provision for mortgage losses for loans and advances to customers was £65.4m (2009: £59.1m).

At 31 December 2010, there were 471 (2009: 443) mortgage accounts 12 months or more in arrears. The total mortgage arrears in these cases were £8.0m (2009: £4.4m) and the total of principal loans outstanding was £93.7m (2009: £61.5m). The increase in the outstanding loan amount and arrears is mainly in respect of commercial loans.

Principal Risks and Uncertainties

A summary of the principal risks and uncertainties facing the Society, and its subsidiary undertakings, and the procedures put in place to manage them is set out below with more detail provided in Note 36 to the Accounts on pages 53 to 72.

The Board retains full responsibility for the operational activities of the Society. In order to ensure that the interests of its members are adequately protected at all times, the Board has established and embedded a robust governance structure and risk management framework that are designed to identify, manage, monitor and control the major risks exposed in the delivery of the Society's strategic objectives. Details of the Society's governance structure are included in the Corporate Governance Report on pages 12 to 14.

The principal risks that arise from the Society's operations are credit, treasury, operational, strategic and external risks. These key categories of risk are common to most financial services organisations in the UK.

Risk Management Framework

The oversight and direction of the Board is central to the Society's risk management framework. It ensures, through a series of Board sub-committees and management forums, that appropriate policies, procedures and processes are implemented across the business to control and monitor risk exposure.

The framework identifies operational roles and responsibilities (both individual and collective) in the risk management process and ensures that exposed risks are aligned to the Risk Appetite Statements of the Board, with any unacceptable risk exposures being managed and mitigated. Each of the Board sub-committees includes at least two non-executive Directors, with other committee members drawn from the executive and appropriate members of senior management.

The key risk orientated committees, operating under the delegated authority of the Board, include the Group Risk Committee (GRC), Assets and Liabilities Committee (ALCO), Board Credit Committee (BCC) and Audit Committee (AC).

Further details relating to the GRC, ALCO, AC and BCC are set out in the Corporate Governance Report on pages 12 to 14.

Additional oversight and direction is delivered through a weekly Operational Review Committee (ORC) and a monthly Strategic Review Committee (SRC), which enable the senior management team to manage the day-to-day risks within the business.

At an operational level, specialist management forums have been established to review the day-to-day performance of the business. These include a Management Assets and Liabilities Committee, a Business Continuity Group, an Information Security Forum, a Treating Customer Fairly Steering Group and a Pricing Committee. In addition, an Integrated Assurance Group, comprising representatives of the Society's key control functions, co-ordinates the development and testing of operational controls.

Credit Risk

The Board accepts that, in the delivery of its strategic plans, the Society will be exposed to the risk of loss arising out of the failure of borrowers to repay their credit

commitments. As a building society, Leeds Building Society is inherently exposed to credit risk within its core operations.

Material exposures are limited to the provision of loans secured on property within the UK and, although the Society has some elements of credit risk attached to commercial, overseas and unsecured lending, over 85% of the Society's credit risk is in the form of UK residential mortgages.

Residential mortgage exposures are managed in accordance with the Board approved Lending Policy. This policy is implemented with the support of credit scoring systems and underwriting processes, which assess the applicants ability and willingness to pay, alongside the suitability of the proposed security property. These front end processes underpin the assessment of potential borrowers, prior to completion. Post completion, day-to-day, management of borrowers' accounts is the responsibility of the Customer Service and Customer Care teams.

The BCC reviews high level trends and indicators by monitoring product and sector limits, together with detailed analyses of arrears, loan-to-value ratios, expected losses and scorecard performance. In 2010, the Society made appropriate changes to its Residential Lending Policy and product range to reflect the economic environment. In addition, a new mortgage application scorecard was implemented by the Society, from the beginning of October, which will enhance the lending decision process.

For two credit risk exposures (unsecured and commercial loans) the Society withdrew from new lending in 2008 due to a reduced risk appetite for such lending. Operationally, Management has retained appropriately skilled staff to ensure the orderly run-off of the closed books. Subcommittee oversight continues to challenge Management on its performance. In the short term, it is unlikely that the Society will re-enter these markets.

In addition to the retail credit risk exposures noted above, there is also an inherent risk that Treasury counterparties default on their obligations to the Society and create counterparty credit risk losses. The risks associated with, primarily, unsecured Treasury counterparty lending appear, overall, to be low, given that the Society only lends to financial organizations which have a minimum credit rating of A3 (95% of the portfolio), although some lending is also undertaken to unrated building societies. The risks arising from counterparty failure are overseen by the ALCO and are considered to have reduced in 2010, when compared to 2009. In particular, the Society has reduced its exposure to counterparties in Spain, Ireland and Portugal from £86m, at the end of 2009, to £47m, at the end of 2010. This is expected to reduce further in 2011. The Society has no exposure to Greece.

Treasury Risk

Interest rate risk is the potential adverse change in the Society's income or the value of the Society's net worth, arising from movements in interest rates. Interest rate risk arises from the differing interest rate characteristics of the Society's mortgages, savings and other financial instruments.

Operating under a Board approved Financial Risk Management Policy, interest rate risk is managed by Group Treasury, through the use of appropriate hedging instruments, or by taking advantage of natural hedges within the Society's balance sheet. In 2010, the operating environment has continued to be influenced by prevailing low interest rates and lower business volumes than in recent years. In the second half of 2009, Management targeted a reduction of the risk taken in this area and the actions started last year have been successfully completed.

Liquidity risk is whether the Society will be unable to meet current and future financial commitments as they become due. The Society's policy has always been to maintain sufficient liquidity to cover cash-flow imbalances and fluctuations in funding, to retain full public confidence in the solvency of the Society and enable it to meet its financial and regulatory obligations. In line with the plan established last year the overall quality of liquid assets has been increased, which has reduced this risk further. At the end of 2010, the proportion of long term wholesale funding represented over 40% of the Society's total funding received from wholesale counterparties and provides a stable and secure base for the Society's operations.

In 2010, the Society did not experience any significant events relating to its other treasury risk exposures (settlement, currency and complex product risk). Notwithstanding this position, it maintains a highly controlled environment which is subject to the oversight of the ALCO.

Operational Risk

To minimise operational risk, the Society maintains a system of internal controls, which reflects the size and scale of the business. Central to the risk management framework is an ongoing risk assessment, which identifies and assesses all risks that may arise from operational activity. Whilst credit and treasury risk exposures are principally borne out of the Board's Appetite for Risk, operational risk arises as a consequence of fulfilling the stated appetite.

The Society has, therefore, embedded its operational risk management framework and established a common structure in all business activities for managing risk and identifying control issues. Whilst the Audit Committee acts as the relevant oversight body, the day to day management of operational risk is the responsibility of line management and the ORC and SRC.

The Society has developed broad groupings of operational risk that incorporate various different types of risk including legal and regulatory process and system type risks, and people and financial crime type risks.

Under the Basel II framework the Society currently operates the Basic Indicator Approach to its calculation and allocation of capital for Operational Risk. In 2011, the Society is planning to develop its methodology so that it is a position to migrate to the more sophisticated and sensitive Standardised Approach (TSA). This is in line with the Society's commitment to the continuous improvement of its risk management practices.

Other Risks

In addition to the key areas of risk already noted above, the Board has identified a number of risks which stand alone from the core groupings. These include reputation and business risks. Whilst the Board is fully aware of the potential impact of such risks, particularly in times of economic uncertainty, they are peripheral to the Society's physical operations and, accordingly, senior management and the Board retain the ownership and responsibility for these exposures.

Uncertainties

With reference to 2011, the principal uncertainties facing the Group are associated with difficulties within the European Union (EU), the UK economy as a whole and the outlook for financial markets.

In 2010, two EU countries, Greece and Ireland, received emergency funding from the EU and International Monetary Fund. Other countries in the EU, principally Portugal and Spain, are now also considered to be at risk of requiring some form of support. The Society has progressively reduced its exposure to all of these countries and now has only a small number of legacy positions, which will mature between 2011 to 2014. The emergency funding deals to date have not required any bondholders to suffer a loss on their holdings and on that basis the Society's loans are expected to be fully repaid when they mature. The difficulties in the EU have also resulted in some debates over the long term future of the Euro currency. The Society has less than 4% of its commercial assets denominated in Euros and the currency risk is protected through derivative instruments.

Residential house prices and arrears levels in 2010 have been better than expected and, although Management considers that the Society's residential portfolio is well placed, the outlook for the coming year would be affected by rising unemployment and any increase in interest rates, both of which would put pressure on borrowers' ability to repay. The Board expects unemployment to rise only modestly, in 2011, as the impact of the Government's spending review is likely to be offset partially by growth in employment in the private sector. It also expects interest rates to remain relatively low, which is beneficial from an affordability perspective, and house prices to remain broadly flat. In light of these conditions, and the more positive outlook for the economy in general, the Society has an appetite for increasing new lending above the levels achieved in the past three years, albeit without any relaxation in the current underwriting criteria.

The commercial property market has remained subdued in 2010. However, commercial property values stabilized in 2010, which together with an improvement in the UK economy provide a more positive outlook for this sector, than in the last few years. The Society ceased lending in this market, in 2008, and is now working closely with its existing borrowers to help them continue to meet their obligations to the Society. Where this is not possible, the Society will take the necessary action to mitigate its exposure. The Society has balance sheet provisions of £34m for impaired loans in the commercial portfolio and the amount of provisions in 2011 will be determined by the extent that the improved conditions assist the borrowers' ability to fulfil their future commitments.

Although there has been some easing in the wholesale markets during 2010, the availability of wholesale funding in the forthcoming year is likely to be affected by the maturity of Government backed schemes. These conditions have led to an increased demand for retail savings, which in turn has led to a rise in the cost of new funds and this is likely to continue, into 2011. The Society, which raised £486m of long term funding in 2010, has met its current requirements and, as a consequence, no new long term funds are required in 2011. In addition, as the Society has retained its strong credit ratings, it is able to continue to access short term funds from the wholesale markets, at a competitive rate. This position, together with the planned lending targets, means that the level of retail funding required, in 2011, is similar to the amount raised in 2010. Accordingly, the Society will be able to compete in the retail market, on a selective basis.

Following the difficulties faced by the financial markets since 2007, the regulatory architecture is being enhanced, with changes covering the mortgage market, the management of funding and liquidity risk and capital levels, all of which are likely to have a significant impact on the financial services sector. In addition, the Society's current regulator, the Financial Services Authority, is being split into two. A new Prudential Regulation Authority, within the Bank of England, will be responsible for the prudential regulation of financial institutions, including building societies. A new Customer Protection and Markets Authority is also to be established.

All these changes are likely, to some extent, to impact the way the Society and other banks and building societies operate. These developments are taking up a considerable amount of Management's time, in ensuring that the Society remains compliant, effective and well capitalised.

Basel II - Pillar 3

The disclosures required under Basel II - Pillar 3 are published on the Society's website within four months of the end of the financial year.

Going Concern

The current economic conditions present increased risks and uncertainties for all businesses. In response to such conditions, the Directors have carefully considered these risks and uncertainties and the extent to which they might affect the preparation of the Financial Statements on a going concern basis.

The directors consider that:

• the Group maintains an appropriate level of liquidity, sufficient to meet both the normal demands of the business and the requirements which might arise in stressed circumstances. It also maintains a borrowing facility to supplement liquidity if required;

• the availability and quality of liquid assets are structured so as to ensure funds are available to repay any maturing wholesale funds and exceptional demand from retail investors. These assets are principally invested with banks and building societies which meet the requirements of the Group Financial Risk Management Policy. The Policy is regularly reviewed and updated to take into account changes to the credit risk assessment of each counterparty;

• the Group's other assets are primarily in the form of mortgages on residential property. Regular assessment of the recoverability of all mortgage assets is undertaken and provision made where appropriate. The Directors consider that the Group is not exposed to losses on these assets which would affect their decision to adopt the going concern basis; and

• reasonable profits have been generated in order to keep gross capital at a suitable level to meet regulatory requirements. In the current environment, profitability is affected by the low interest environment and increased impairment losses on loans and advances to customers. Having reviewed its plans and forecasts for the coming period, the Directors consider that the Group is able to generate adequate profits to enhance the capital of the Society, and to improve its solvency in the future.

The Directors, therefore, consider that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

"... the Society recognizes the importance of effective communication with its members."

Directors

The following persons served as Directors of the Society during the year:

Mr R. A. Smith

(Chairman)

Mr S. R. G. Booth(Vice Chairman)

Mr I. W. Ward(Chief Executive)

Mr J. N. Anderson

Mr P. A. Hill

(Operations Director)

Mrs C. M. Kavanagh

Mr I. Marshall(resigned 12 February 2010)

Mr D. Pickersgill(Deputy Chief Executive)

Mr L. M. Platts(appointed 26 October 2010)

Mr A. Rajguru

Ms K. L. Rebecchi(Sales and Marketing Director)

Mr I. Robertson

Mr R. W. Stott

Details of the Directors of the Society at 31 December 2010 and who continue in office are shown on pages 6 and 7.

In accordance with the Rules, Mr L. M. Platts offers himself for election, and Mr S. R. G. Booth and Mr I. W. Ward offer themselves for re-election by the members at the Annual General Meeting.

None of the Directors holds any beneficial interest in shares in, or debentures of, any subsidiary undertakings of the Society.

Corporate Governance

Statements on Corporate Governance and Directors' Responsibilities are set out on pages 12 to 14 and page 17.

Auditors

The auditor, Deloitte LLP, have expressed their willingness to continue in office and in accordance with Section 77 of the Building Societies Act 1986, a resolution for their reappointment as auditors will be proposed at the Annual General Meeting.

Charitable and Political Donations

The Group made a donation of £113,000 to the Leeds Building Society Charitable Foundation. Our Caring Saver Account enabled further donations of £43,000 to be made to charities. Other charitable donations in the year amounted to £57,000. No contributions were made for political purposes. Further details are included in the Chief Executive's Review.

Environmental Policy

The Society recognises that it has a responsibility to protect the environment for its members and the community and appreciates that its activities may sometimes have an impact on the environment. The Society has, therefore, an agreed policy, and a 'Go Green' team, which seek to identify and sympathetically consider environmental issues in all activities and areas of business.

In the course of premises upgrades, and refurbishments, improvements are designed to incorporate energy efficient technologies.

The Society has an active recycling waste management policy and, specifically, the amount of waste paper recycled has been significantly increased. Where available, the Society uses good quality combined heat and power which is considered to be more environmentally friendly than traditional methods of production. The Society works in partnership with its suppliers to manage and minimise carbon emissions.

Changes to the Society's printing strategy have seen a reduction of 20% in the amount of paper utilised in 2010, compared to 2009. Our environmental approach has been recognized by the award of the Carbon Trust Standard - the first building society to achieve this.

Communication with members

As a member-owned business, the Society recognises the importance of effective communication with its members. Each month, the Society uses an independent market research company to consult with members, and the outcome is reported quarterly to the Board.

Through its subsidiary, Leeds Financial Services Limited, the Society hosts a number of seminars for new and existing members to discuss their financial needs and this also provides an opportunity to discuss more general issues. In addition, senior management undertakes a regular programme of branch visits to meet both staff and customers. A formal framework also exists for written communications with members.

The Society encourages all eligible members to participate in the AGM, either by attending in person or voting by proxy. In order to encourage voting at the 2011 AGM, members will, once again, be able to vote online using the internet, and a charitable donation is being made for each vote cast.

In this regard, a choice of charitable recipients is being offered. In 2010, 15.1% of members who voted used the internet.

All voting members receive a copy of the 'Highlights' magazine which provides information and updates on the Society's activities, together with the Summary Financial Statement.

Staff

The Society has maintained and developed systems during the year for effective communication with employees. The provision of information continues through the Intranet, e-mail, circulars, staff magazine, meetings, presentations and team briefings to ensure staff are aware of the Society's performance and objectives and the business environment in which it operates. There is a Staff Association, through which members of staff make their views known on matters that affect their employment and, in addition, there is also a regular staff satisfaction survey.

It is the Society's policy to consider employment applications, provide access to training, career development and promotion opportunities to all regardless of their gender, sexual orientation, marital or civil partner status, gender re-assignment, race, religion or belief, colour, nationality, ethnic or national origin, disability or age, pregnancy, trade union membership, or part-time or fixed term status. Wherever possible, staff who develop a disability continue their employment with appropriate training or redeployment where necessary and reasonable adjustments are accommodated.

Creditor Payment Policy

The Group's policy is to agree terms and conditions with suppliers, under which business is to be transacted, to ensure that suppliers are aware of the terms of payment and to pay in accordance with its contractual and other legal obligations. The creditor days stood at 10 days at 31 December 2010 (2009: 10 days).

Post Balance Sheet Event

The Directors consider that no events have occurred since the year end to the date of this Report that are likely to have a material effect on the financial position of the Group as disclosed in the Annual Accounts.

By order of the Board

Andrew J. Greenwood

Secretary

21 February 2011

Leeds Building Society voluntarily has regard to best practice, as recommended by the Combined Code on Corporate Governance, issued by the Financial Reporting Council (FRC), which applies to listed companies. The most recent version came into effect in June 2008. The Combined Code sets out principles for ensuring the effectiveness of non-executive directors and contains guidance in relation to audit committees. This report explains the Society's approach to Corporate Governance, and sets out details of the principal Board sub-committees, together with attendance records for those Committees.

Corporate Governance Report

For the year ended 31 December 2010

Introduction

Leeds Building Society voluntarily has regard to best practice, as recommended by the UK Corporate Governance Code, (the Code) formerly the Combined Code on Corporate Governance, issued by the Financial Reporting Council (FRC), which applies to listed companies. The Code sets out principles for ensuring the effectiveness of non-executive directors. The most recent version came into effect in July 2010. It applies to accounting periods beginning on or after 29 June 2010. However, the Society has taken a proactive approach, and will have regard to the Code for the accounting period which began on 1 January 2010. The FRC also publishes, under the Code, guidance in relation to audit committees. This report explains the Society's approach to Corporate Governance, and sets out details of the principal Board Sub- Committees, together with attendance records for those Committees.

Recent Developments in Corporate Governance

In addition to the introduction of the UK Corporate Governance Code, the principal development has been the Financial Services Authority's policy statement on effective corporate governance, which sets out changes to the framework relating to the Approved Persons regime, including the roles covered and the arrangements for obtaining approval. The new arrangements come into force in May 2011, and represent the FSA's response to the Walker review.

The FRC has also consulted on changes to the Higgs guidance on improving board effectiveness, and the Society will consider the final version when it is published, in 2011. Any changes to the FRC guidance on employing the statutory auditor for non-audit services will also need to be taken into account.

The Board

At 31 December, 2010, the Board comprised four executive and eight non-executive Directors. The offices of Chairman and Chief Executive are distinct and held by different individuals. The Chairman is principally responsible for leading the Board and is not involved in the day to day management of the Society. The Chief Executive's responsibilities are focused on running the Society and implementing strategy.

In accordance with relevant provisions in the Code, the Board considers that all non-executive Directors are free of any relationship which could materially interfere with the exercise of their independent judgement. Whilst Mr L. M. Platts left Deloitte, the Society's current external auditor, in May 2008, within three years of his appointment to the Society's Board, he was not, at any point involved with the Society's audit, and the Directors consider that these circumstances do not affect his independence of character and judgement (see also below in respect of Mr S. R. G. Booth). All Directors have access to the advice of the Secretary and, if necessary, are able to take independent professional advice at the Society's expense. A brief biography of each Director is set out on page 7. The Board considers that the Directors' skills and expertise complement each other to provide the appropriate balance, in terms of protecting members' interests and addressing the requirements of the business. The role of Senior Independent Director under the Code, insofar as it applies to the Society, is undertaken by the Vice-Chairman.

The Board operates through meetings of the full Board, as often as necessary for the proper conduct of business, normally at monthly intervals, and its main committees which are detailed on pages 13 to 14. At least annually, the non-executive Directors meet without the executive Directors being present. The Board's focus is on the formulation of strategy and the monitoring and control of business performance. A framework of delegated authorities is in place, which extends to the Society's Officers, management and various management committees. This was reviewed and updated during the year.

The appointment of new Directors is considered by the Nominations Committee, which makes recommendations to the full Board. Members of the Society are also entitled to nominate candidates for election to the Board. Each Director must meet the tests of fitness and propriety prescribed by the FSA and must receive approval from the FSA, as an Approved Person. All Directors are required to submit themselves for election by the Society's members at the first opportunity after their appointment and for re-election every three years. Nonexecutive Directors are not usually expected to serve for more than three full three year terms, following first election to the Board. Ordinarily, Mr S. R. G. Booth, the Society's Vice Chairman, who has completed ten years as a non-executive Director, would have stood down at the 2010 Annual General Meeting. However, in light of the unprecedented economic environment, the Nominations Committee, endorsed by the Board, considered that Mr Booth's independence would not be compromised by serving for a further year, and his extensive experience of both the business environment generally, and the Society's business and operating environment made it appropriate to extend his term of office. Accordingly, Mr Booth stood for re-election at the 2010 Annual General Meeting and was duly re-elected. In the context of the Board's agreed succession plan, and in order to facilitate a smooth transition, the Board remains of the view that it would be appropriate to retain Mr Booth for a further year, and that this will not compromise his independence, particularly in view of the nature of his strong, independent-minded contributions. As part of the succession plan, it has been agreed that Mr Booth will retire at the 2012 Annual General Meeting.

In May 2010, it was announced that Mr I. W. Ward would retire as Chief Executive on 31 December 2010, and be succeeded by Mr D. Pickersgill, the current Deputy Chief Executive and Finance Director. However, Mr Pickersgill has been absent from work, through illness, since 13 September 2010, and under the circumstances, Mr Ward has agreed to remain as Chief Executive until the situation is resolved. As it will be three years since he last stood for re-election, in accordance with the Society's Rules, Mr Ward is standing for re-election at the 2011 Annual General Meeting.

The 2010 version of the Code includes a provision that all Directors should stand for re-election each year. This was originally recommended by Sir David Walker as a measure for FTSE 100 companies. However, as stated above, the Society's Rules require that Directors should stand for election at the Annual General Meeting following their appointment and every three years thereafter. Members also have the opportunity to vote on the Board as a whole, by virtue of the Resolution to receive the Directors' Report, the Annual Report & Accounts, and Annual Business Statement, as well as the resolution to receive the Summary Directors' Remuneration Report. Potentially, the new Code provision could also be disruptive, in terms of the ongoing management of the Society if none of the Directors were re-elected. In all the circumstances, the Board considers the current arrangements are appropriate, and would not propose that all Directors are subject to re-election on an annual basis.

The Board and its committees are supplied with full and timely information. Ordinarily, papers are sent out one week prior to Board and Board Sub-Committee Meetings.

Audit Committee

The Audit Committee, which meets at least five times a year, is a sub-committee of the Board and makes recommendations to it. Its Terms of Reference reflect the guidance on Audit Committees, published as part of the UK Corporate Governance Code. Its principal role is to:

• monitor the integrity of the financial statements of the Society and any formal announcements relating to the Society's financial performance, reviewing significant financial judgements contained in them;

• ensure the Society's internal financial and business control and risk management systems have operated as defined in control documentation and comply with policies, procedures, laws, regulations and other relevant requirements;

• monitor and review the effectiveness of the Society's Internal Audit function;

• make recommendations to the Board in relation to the appointment and remuneration of the external auditor and to monitor and review the external auditor's independence, objectivity and effectiveness, taking into consideration relevant United Kingdom professional and regulatory requirements;

• develop and implement the policy on the engagement of the external auditor to supply non-audit related services; and

• review how the Society complies with best practice in regard to corporate governance and to report annually thereon to the Board.

The Chairman of the Committee was Mr I. Marshall until he resigned on 12 February 2010, and was succeeded by Mr I. Robertson. The other members were Mr A. Rajguru, and Mr R.W Stott. The Committee invites the presence of internal and external auditors and members of management when considered helpful for the conduct of its Terms of Reference. The Audit Committee usually meets with the external auditor without executive management being present, at the beginning of each meeting. The Board is satisfied that the composition of the Committee provides recent and relevant financial experience.

Internal Control

The Board is responsible for defining the Society's risk appetite, and for determining the framework and strategies for control and risk management. Senior management is responsible for designing, operating and monitoring robust and effective internal control and risk management processes. The Audit Committee, on behalf of the Board, regularly receives reports on the adequacy and effectiveness of these processes from the objective and independent Internal Audit function. This has operated throughout the year.

Through its meetings, the Audit Committee has reviewed the effectiveness of the Society's systems of internal control for the year to 31 December 2010, on behalf of the Board, and has taken account of any material developments that may have taken place since the year end. These systems of control are designed to manage, rather than eliminate, the risk of failure to achieve business objectives and to provide reasonable assurance as to the safeguards protecting the business against the risk of material error, loss or fraud. A report setting out the work of the Audit Committee is provided to the Board on an annual basis.

Group Risk Committee

The Group Risk Committee, a sub-committee of the Board, met four times in 2010, to review all Group risk management activities and appraise all Group capital requirements. The Committee oversees the allocation of capital requirements to risk types, formulates and recommends to the Board the Internal Capital Adequacy Assessment Process, and assesses the overall appropriateness and effectiveness of risk systems and management information. As part of this process, the Committee receives standing reports on the refreshed Corporate Risk Register, external risk indicators and emerging risks. It also refines the Society's risk appetite approach for consideration by the Board. During the year, the Chairman of the Committee was Mr A. J. Greenwood, General Manager & Secretary. The Board members of the Committee were Mr I.W. Ward, Mr D. Pickersgill, Mr P. A. Hill, Ms. K. L. Rebecchi, Mr I. Marshall, Mr I. Robertson, and Mr A. Rajguru. The membership of the Committee will be reviewed in 2011, in light of the FSA's policy statement on effective corporate governance.

Details of the types of risk faced by the Society, together with details of how these risks are managed, are set out in the Directors' Report, and the Notes to the Accounts.

Assets and Liabilities Committee

The Assets and Liabilities Committee, which meets monthly, is a sub-committee of the Board and oversees treasury policy, in line with the Board approved Financial Risk Management Policy. In particular, the Committee oversees wholesale funding and liquidity investment strategies, hedging, interest rate risk management and counterparty credit criteria. It also considers and recommends to the Board, the Society's Individual Liquidity Adequacy Assessment. During the year, the Chairman of the Committee was Mr D. Pickersgill, (Mr I. W. Ward from 13 September 2010, during Mr Pickersgill's absence). The other Board members of the Committee were Mr I. W. Ward, Mr P.A. Hill, Ms. K. L. Rebecchi, Mr I. Marshall, Mr A. Rajguru, and Mr R. W. Stott.

Nominations Committee

The Nominations Committee is a subcommittee of the Board and makes recommendations to it. During the year, its members were Mr R. A. Smith (Chairman), Mr I. W. Ward, Mr D. Pickersgill, and Mr S. R. G. Booth.

Its main responsibility is to make recommendations on appointments to the Board, so that it comprises sufficient Directors who are fit and proper and can meet the collective and individual responsibilities of the Board members, both efficiently and effectively. It considers succession planning, taking account of the challenges and opportunities facing the Society and what skills and expertise are, therefore, needed on the Board in the future. In considering appointments, the Committee will take account of the requirements under the Building Societies Act, the Society's Rules and the UK Corporate Governance Code. Before any recommendations on appointment are made to the Board, the Committee will formally assess the aptitude, qualifications and experience of individual candidates. All appointments to the Board are made on merit and against objective criteria.

During the year, the Nominations Committee met on four occasions. Following a review of Board composition, it was decided to appoint an additional non-executive Director, and Mr L. M. Platts joined the Board, following approval by the Financial Services Authority, on 26 October 2010. He will be offering himself for election at the 2011 Annual General Meeting.

Any future appointments will also be subject to approval by the FSA and election by the Society's members, at the AGM in the next financial year after appointment.

Credit Committee

The Credit Committee is a sub-committee of the Board, and in 2010 met quarterly and additionally as required. Its Terms of Reference relate to the formulation of policy pertaining to asset quality and credit risk within the Society, (including residential, commercial, lifetime, and unsecured credit risks) for approval by the Board. During the year, the Chairman of the Credit Committee was Mr G. M. Mitchell, Acting Finance Director. The Board members of the Committee were Mr I. W. Ward, Mr D. Pickersgill, Mr P. A. Hill, Mr I. Robertson, and Mr R. A. Smith.

Remuneration Committee

Detailed information on the work and composition of the Remuneration Committee is set out in the Directors' Remuneration Report at pages 15 and 16.

Auditors

The Society has a policy on the use of the external auditor for non-audit work, which is implemented by the Audit Committee.

The purpose of this policy is to ensure the continued independence and objectivity of the external auditor. The external auditor, Deloitte LLP, undertook a number of nonaudit related assignments during 2010 and these were conducted in accordance with the policy and are considered to be consistent with the professional and ethical standards expected of the external auditor, and in the Society's best interests. Details of the fees paid to the external auditor for audit and non-audit services are set out in note 9 to these Accounts.

Directors' Development and Performance Evaluation

The Society's Chairman, on behalf of the Nominations Committee, conducts a formal documented evaluation of the nonexecutive Directors, on an annual basis.

Following the completion by all nonexecutive Directors of a questionnaire, and with the benefit of feedback from the executive Directors, the Chairman reviews the performance of each non-executive Director individually, the effectiveness of each Board sub-Committee, and the Board as a whole. In addition, each Board Committee reviews its own performance, and the outcome is fed back to the Chairman, which then forms part of the process for evaluating the effectiveness of each of those Committees. The Chairman's performance is reviewed, in his absence, by the Board as a whole. Feedback is given to him by the Vice-Chairman. Ongoing training and development requirements for nonexecutive Directors are identified through the performance evaluation process, and documented in training plans. All newly appointed non-executive Directors undertake a comprehensive, tailored induction programme. Executive Directors are evaluated within the performance evaluation framework for employees generally and by the Remuneration Committee, with regard to their remuneration.

Terms of Reference

Copies of the Terms of Reference for the Audit, Group Risk, Assets and Liabilities, Nominations, Remuneration and Credit Committees are available on the Society's website, or on written request from the Society's Secretary.

Andrew J. Greenwood

Secretary

21 February 2011

Board and Board Committee Membership attendance record

(The number in brackets is the maximum number of scheduled meetings that the Director was eligible to attend).

R. A. Smith 10(10) - - 4(4) 3(4) - -

S. R. G. Booth 9(10) - 3(3) 4(4) - - -

C. M. Kavanagh 9(10) - 3(3) - - - -

D. Pickersgill  7(10) - - 1(2) 3(4) 8(12) 3(4)

L. M. Platts 1(2) - - - - - -

K. L. Rebecchi 10(10) - - - - 11(12) 3(3)

I. Robertson 10(10) 6(6) - - 4(4) - 3(3)

*Mr D. Pickersgill has been absent from work, through illness, from 13 September 2010, and Mr G. M. Mitchell General Manager Finance & Risk was appointed Acting Finance Director with effect from 26 October 2010. Mr Pickersgill's absence has not adversely affected the ongoing management of the Society's affairs.

Directors' Remuneration Report

For the year ended 31 December 2010

Introduction

This report, together with the details in note 10 to the Accounts, provides information about the Society's policies on remunerating Directors and senior executives and discloses the remuneration of the Directors. The report considers all the areas set out in the UK Corporate Governance Code relating to remuneration, insofar as they are considered relevant to building societies. The report also reflects, insofar as relevant to the Society, enhanced disclosure requirements arising under the third EU Capital Requirements Directive. A summary of this report will be sent to all members eligible to vote at the 2011 Annual General Meeting, who will have the opportunity to participate in an advisory vote on the report.

The Remuneration Committee, under delegated authority from the Board, is responsible for the Society's Remuneration Policy and ensures it follows best practice, and meets regulatory disclosure requirements. The principles underlying the Remuneration Policy are that:

• it is in line with the business strategy, objectives, values, and the long term interests of the Society;

• the Policy, procedures, and practices are consistent with, and promote, sound and effective risk management, and do not encourage risk taking which exceeds the level of the Society's risk appetite; and

• the Society should provide competitive and fair remuneration packages to attract and retain employees of sufficient calibre.

The Remuneration Policy also identifies management and staff who are considered 'material risk takers', as defined by the Financial Services Authority's Remuneration Code. Apart from the Directors and General Managers, this includes senior managers in Mortgage Lending, Risk, Internal Audit, Compliance, IT, Sales, and Commercial Lending.

The Committee considers remuneration for the Society's staff generally and, specifically, the remuneration of the Society's Chairman, executive Directors and senior executives. Changes to the level of fees for non-executive Directors (excluding the Society's Chairman), reflecting the time commitment and responsibilities of the role, are received from the executive Directors.

Payments have been awarded this year in accordance with the senior executives' performance related pay arrangements, which are an integral part of their remuneration packages. They reflect the executives' performance being measured against testing criteria, specified by the Board, in the context of challenging market conditions.

Composition and Scope of the Remuneration Committee

The Remuneration Committee comprises solely non-executive Directors who do not have any day-to-day involvement in the operations of the Society and no personal financial interest in the recommendations. The Chairman of the Committee is Mr S.R.G. Booth, and the other members are Mr J.N. Anderson, Mrs C.M. Kavanagh, and Mr R.W. Stott. No executive Directors or other Society employees are members of the Remuneration Committee. Executive Directors and other members of senior management are invited to attend by the Committee, as appropriate. The Society's Deputy Secretary, Mr G. Jennings, acts as Secretary to the Committee.

The Committee reports to the Board on the remuneration and terms of engagement of executive Directors and other members of senior management, together with wider aspects of remuneration policy for all members of staff and the fees for the Society's Chairman. All recommendations are considered by the full Board, but no Director participates in discussions when decisions relating to his or her own remuneration are made.

In 2010, the issues considered by the Committee included the design of, and setting of objectives for, the 2010 executive performance-related pay scheme, an overview of the rewards and benefits for all members of the Society's staff, and the pay awards for the executive Directors, and the Society's Chairman. The Committee also reviewed the Society's Remuneration Policy in the context of the FSA Remuneration Code, and enhanced EU disclosure requirements. It also considered changes to the commutation factors and dependants' benefit entitlement, and changes to the tax relief rules, in relation to the Leeds Building Society Staff Pension Scheme. In addition, the Committee's Terms of Reference were reviewed. In all matters discussed, consideration is always given to best practice within the financial services industry.

Remuneration Policy for Executive Directors

Remuneration packages are set at a level to attract, motivate and retain executive Directors and senior management of a high standard and to reward them fairly and competitively for their responsibilities, performance and experience. This ensures that the skill levels appropriate to operate an organisation as complex as the Society are maintained. In making its assessment on remuneration and incentive schemes, the Committee has regard to the salaries and incentives payable to executives in similar roles in comparable organisations.

The executive Directors' remuneration comprises an annual salary, annual performance related pay, long-term incentive plan, pension scheme membership and health care insurance. The performance-related elements of remuneration are designed to recognize corporate and personal success on both an annual and longer term basis, whilst at the same time ensuring that any objectives agreed are aligned with both the principles of sound risk management and the risk appetite of the Society. In order to ensure this, the draft Corporate Objectives, and performance-related pay arrangements are subject to review by the Group Risk Committee (executive management does not participate in this review). A significant proportion of the executive Directors' remuneration is, therefore, linked to the Society's and the individual's performance.

Under the annual performance related pay scheme for executive Directors, an amount of up to 40% of basic salary may be awarded at the discretion of the Board of Directors (there is no minimum award). This is based on achievement against corporate and personal objectives of a financial and non-financial nature. These are agreed in advance by the Committee and are all closely linked to the achievement of the Society's strategic objectives. Recommendations to the Board, of the amount payable under the scheme, are made by the Committee following a detailed review of performance against the agreed objectives.

The executive Directors also participate in long-term (three year) incentive plans (LTIPs), the latest of which matured on 31 December, 2010. A maximum of 20% of basic salary may be accrued under each LTIP and a payment made only if a participant reaches the pre-determined performance level over the three year period.

In order to ensure that these arrangements are adjusted, as appropriate, a downwards modifier applies to payments. Its terms are that if profits fall below pre-set levels, payments are either reduced or, once a threshold level is reached, there is no entitlement to variable remuneration in that year under the performance related pay schemes.

Only annual salary payments are pensionable.

Because the Society has mutual status, it does not issue shares on the stock exchange. Accordingly, there is no share based remuneration available for either the executive Directors or employees.

Salaries and Benefits

The levels of salaries and benefits for the executive Directors and other senior executives are recommended to the Board based on assessments of individual performance and by comparisons with roles carrying similar responsibilities, in comparable financial organisations, with a similar level of complexity and diversity to the Society. No executive Director has the right or opportunity to receive enhanced benefits beyond those already disclosed, and the Committee has not exercised its discretion during the year to enhance benefits (outside the executive Directors' annual salary review), either generally, or for any executive Director.

Service Contracts

The Society's executive Director service contracts can be terminated on twelve months' notice by either the Society or the Director. The non-executive Directors do not have service contracts with the Society.

Pensions

The Deputy Chief Executive and Finance Director, and Sales and Marketing Director, in common with other employees who are members of the Society's defined benefits pension scheme, are entitled to pensions based on final salary and length of service with the Society, with a maximum pension of two-thirds of final salary. Pension entitlements for the executive Directors in the defined benefit scheme are accrued at a rate of 1/45th of the final year's basic salary for each year of service. The Chief Executive also accrued benefits under the defined benefits scheme until 31 January 2010. The Operations Director is a member of the defined contribution scheme.

Policy for non-executive Directors

The level of fees for non-executive Directors (excluding the Society's Chairman) is reviewed annually, by the executive Directors, and appropriate recommendations made to the Board. The level of fees for the Chairman is reviewed annually by the Remuneration Committee, prior to a recommendation to the Board. The reviews are based on the responsibilities and time commitments required for Board and Board subcommittee meetings, and also reflect fees paid in comparable mutual financial services organisations. The Chairman and the non-executive Directors are only entitled to fees and do not participate in any performance related pay scheme or receive any pension arrangements or other benefits.

Directors' Remuneration - year ended 31 December 2010

Full details of Directors' remuneration for 2010 and prior year comparatives, all of which form part of the Report, are provided in note 10 to the Accounts, on pages 34 to 35. Also disclosed, in note 9, is the aggregate fixed and variable remuneration of 'material risk takers', as defined in the FSA's Remuneration Code. No employee of the Society receives remuneration which exceeds that of the individuals disclosed in note 10.

S. Rodger G. Booth

Chairman of the Remuneration Committee

21 February 2011

Directors' Responsibilities

For the year ended 31 December 2010

Directors' Responsibilities for Preparing the Annual Accounts

The following statement, which should be read in conjunction with the statement of the Auditor's responsibilities on page 19, is made by the Directors to explain their responsibilities in relation to the preparation of the Annual Accounts, Annual Business Statement and Directors' Report.

The Directors are required by the Building Societies Act 1986 (the Act) to prepare, for each financial year, annual accounts which give a true and fair view of the income and expenditure of the Society and the Group for the financial year and of the state of affairs of the Society and the Group as at the end of the financial year and which provide details of directors' emoluments in accordance with Part VIII of the Act and regulations made under it.

The Act states that references to International Financial Reporting Standards (IFRS) accounts giving a true and fair view are references to their achieving a fair presentation.

In preparing those Annual Accounts, the Directors are required to:

In preparing those Annual Accounts, the Directors are required to:

• select appropriate accounting policies and apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether the Annual Accounts have been prepared in accordance with IFRS; and

• prepare the Annual Accounts on the going concern basis, unless it is inappropriate to presume that the Group will continue in business.

In addition to the Annual 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.

Directors' Responsibilities for Accounting Records and Internal Control

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

• keep accounting records in accordance with the Building Societies Act 1986; and

• take reasonable care to establish, maintain, document and review such systems and controls as are appropriate to its business in accordance with the rules made by the Financial Services Authority under the Financial Services and Markets Act 2000.

The Directors have general responsibility for safeguarding the assets of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance of the corporate and financial information included on the Society's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other juristictions.

Robin Smith

Chairman

21 February 2011

Independent Auditor's Report

To the Members of Leeds Building Society

We have audited the Group and Society financial statements of Leeds Building Society for the year ended 31 December 2010 which comprise the Group and Society Income Statements, the Group and Society Statements of Comprehensive Income, the Group and Society Statements of Financial Position, the Group and Society Statements of Changes in Members' Interest, the Group and Society Statements of Cash Flows and the related notes 1 to 37.The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the Society's members, as a body, in accordance with section 78 of the Building Societies Act 1986. Our audit work has been undertaken so that we might state to the Society's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Society or the Society's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditors

As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of the financial statements which give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's and Society's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.

Opinion on financial statements

In our opinion the financial statements:

• give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group's and the Society's affairs as at 31 December 2010 and of the Group's and the Society's income and expenditure for the year then ended; and

• have been prepared in accordance with the requirements of the Building Societies Act 1986 and, as regards the group financial statements, Article 4 of the lAS Regulation.

Opinion on financial statements

In our opinion:

• the Annual Business Statement and the Directors' Report have been prepared in accordance with the requirements of the Building Societies Act 1986;

• the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the accounting records and the financial statements; and

• the information given in the Annual Business Statement (other than the information upon which we are not required to report) gives a true representation of the matters in respect of which it is given.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Building Societies Act 1986 requires us to report to you if, in our opinion:

• proper accounting records have not been kept by the Society; or

• the Society financial statements are not in agreement with the accounting records; or

• we have not received all the information and explanations and access to documents we require for our audit.

Matthew Perkins

(Senior Statutory Auditor)

for and on behalf of Deloitte LLP

Chartered Accountants and

Statutory Auditor

Leeds, United Kingdom

21 February 2011