LBS.L Regulatory News (LBS)

CONTENTS Page 

Members and professional advisers 1

Members' report 2

Statement of members' responsibilities 5

Independent auditors' report 6

Statement of comprehensive income 7

Statement of financial position 8

Statement of changes in members' interest 8

Cash flow statement 9

Notes to the financial statements 10

MEMBERS

Leeds Building Society

Leeds Covered Bonds Designated Member (No.1) LimitedLeeds Covered Bonds Designated Member (No.2) Limited

registered office

105 Albion Street

Leeds

LS1 5AS

auditors

MEMBERS REPORT

The members present their annual report on the affairs of Leeds Building Society Covered Bonds LLP ('the Partnership'), together with the audited financial statements for the year ended 31 December 2010 (2009: 17 September 2008 to 31 December 2009).

principal aCTIVITIES

The Partnership has been set up as a special purpose vehicle to raise finance for Leeds Building Society. Its principal activity is to acquire, inter alia, loans and their related security from Leeds Building Society (the seller) pursuant to the terms of the Mortgage Sale Agreement and to guarantee certain payments in respect of the covered bonds. The Partnership will legally hold the Portfolio and the other charged property in accordance with the terms of the transaction documents.

Leeds Building Society raised €50m in August 2010 and a further £250m in November 2010 via two covered bond issues. It also paid back £650m during the year of its original £1.25bn covered bond issue. See note one in the accounting policies section for an explanation of the accounting treatment of these bonds in 2010 and 2009.

results

The profit for the year after taxation amounted to £143,000 (2009: £3,000).

KEY PERFORMANCE INDICATORS

The Limited Liability Partnership is used as a securitisation vehicle, and as such its key performance indicators have been designed to aid Leeds Buildings Society in its role as mortgage administrator. These are:

·; Asset Coverage Test. This test is performed to ensure that the value of mortgage loans held in the portfolio is at least equal to the Sterling equivalent of the aggregate principal amount of the outstanding covered bonds. The percentage calculated shows the excess of mortgages above the value of the covered bonds. At 31 December 2010 the schemes asset coverage percentage was 75.6% (2009: 77.1%).

·; Gross Overcollateralisation, calculated as a percentage. Gross overcollateralisation calculates the percentage value of the mortgage portfolio over and above the value of the aggregate principal amount of the outstanding covered bonds. At 31 December 2010 this was 66.55% (2009: 45.43%).

·; Arrears profile. The arrears profile calculates the number of months that a mortgage loan has been in arrears. See note 19 for the arrears profile analysis for the Partnership at 31 December 2010 and 31 December 2009.

GOING CONCERN

The Partnership's business activities, together with the factors likely to affect the future development, performance and position are set out below. The financial position of the Partnership, its cash flows, liquidity position and borrowing facilities are set out in the financial statements. The Partnership's objectives, policies and processes for managing its capital are described in note 19 to the financial statements.

Details of the Partnership's financial risk management objectives, its financial instruments and hedging activities; and its exposures to operational, liquidity risk and other risks are set out in note 19 and note 21 to the financial statements.

The activities of the Partnership are dependent upon the future funding strategies within the Partnership's UK controlling undertaking, Leeds Building Society. There are no plans to terminate the operations of the Partnership within the next year.

The Directors of Leeds Building Society have considered in detail the Group's forecast performance and liquidity requirements, as well as its regulatory capital and liquidity resources. On this basis, the Directors have a reasonable expectation that, despite current market and economic conditions, which include continued uncertainty over future unemployment and house prices, the Group has sufficient funding and liquidity facilities to ensure that it will continue in operational existence for the foreseeable future. Accordingly the Members of the Partnership have adopted the going concern basis in preparing financial statements, having taken into account the continuing support for the foreseeable future from its ultimate controlling party Leeds Building Society.

Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

MEMBERS REPORT (continued)

members

The Members during the year and to the date of this report were:

Leeds Building Society

Leeds Covered Bonds Designated Member (No.1) Limited

Leeds Covered Bonds Designated Member (No.2) Limited

MEMBERS' INTERESTS

The allocation of profits to and the acceptance/repayment of capital contributions from/to members has been legally formalised. Members are entitled to the sum of £3,000 (or such other sum as may be agreed by the Members from time to time) in aggregate, to be allocated and paid to each Member in proportion to their respective Capital Contribution Balances subject to a minimum of £1 per annum each, as their profit for their respective interests as Member of the LLP.

RISK MANAGEMENT

Risk management within the Partnership is undertaken by Leeds Building Society ('the Society'), primarily by its Assets and Liabilities Committee ('ALCO'). This committee is a sub-committee of the Society's Board, it meets on a monthly basis, and oversees treasury policy, in particular, wholesale and liquidity investment, borrowing strategies, hedging, counterparty and interest rate risk management and counterparty credit criteria. Any proposed additions to the pool are approved by ALCO.

Credit Risk

The Partnership is exposed to the potential risk that a customer will not be able to meets its obligations to the Partnership as they fall due. The risk is managed by facilities with the Society.

Market Risk

Market risk is the risk that the value of a financial instrument will fluctuate due to movement in market factors, or cash flows. Market risk within the Partnership mainly comprises interest rate risk and currency risk. The Market risk is minimised by the use of loans and deposits with the Society as well as the use of appropriate hedging instruments where allowed by IAS 39.

Liquidity Risk

Liquidity risk is the risk that the Partnership will be unable to meet current and future financial commitments as they fall due. The risk is managed by facilities within the Society.

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational loss can result from fraud, errors by employees, failure to comply with regulatory requirements, equipment failures or natural disasters. These risks are managed as an integral part of the operations of each of the Society's business units.

Disclosure of information to auditors

The members who held office at the date of approval of the Members' Report confirm that :

·; so far as they are each aware, there is no relevant audit information (as defined in the Companies Act 2006) of which the Partnership's auditors are unaware; and

·; the members have taken all the steps that they ought to have taken as a members to make themselves aware of any relevant audit information (as defined) and to establish that the Partnership's auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006.

MEMBERS REPORT (continued)

AUDITORS

Deloitte LLP have expressed their willingness to continue in office as auditors and a resolution for their reappointment as auditors will be proposed at the next members' meeting

On behalf of

Leeds Covered Bonds Designated Member (No.1) Limited

The members are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

The Limited Liability Partnerships (Accounts & Audit) (Application of Companies Act 2006) Regulations 2008 require the members to prepare financial statements for each financial year. Under that law the members have elected to prepare the financial statements in accordance with IFRSs as adopted by the European Union. The financial statements are also required by law to be prepared in accordance with the Companies Act 2006, as applicable to limited liability partnerships. 

International Accounting Standard 1 requires that financial statements present fairly for each financial year the firm's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the preparation and presentation of financial statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. However, members are also required to:

·; properly select and apply accounting policies;

·; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and

·; provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance.

The members are responsible for keeping adequate accounting records that disclose with reasonable accuracy at any time the financial position of the firm and enable them to ensure that the financial statements comply with the Companies Act 2006, as applicable to limited liability partnerships. They are also responsible for safeguarding the assets of the firm and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

These responsibilities are exercised by the Board on behalf of the members.

INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF LEEDS BUILDING SOCIETY COVERED BONDS LLP

We have audited the financial statements of Leeds Building Society Covered Bonds LLP for the year ended 31 December 2010 which comprise the Statement of Comprehensive Income, the Statement of Financial Position, the Statement of Changes in Members Interests, the Statement of Cash Flows and the related notes 1 to 21. 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 Limited Liability Partnership's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006 as applied to Limited Liability Partnerships by the Limited Liability Partnership (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008. Our audit work has been undertaken so that we might state to the Limited Liability Partnership'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 Limited Liability Partnership and the Limited Liability Partnership's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of members and auditor

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

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 Limited Liability Partnership'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 of the state of the Limited Liability Partnership's affairs as at 31 December 2010 and of its profit for the year then ended;

·; have been properly prepared in accordance with IFRSs as adopted by the European Union; and

·; have been prepared in accordance with the requirements of the Companies Act 2006 as applied to Limited Liability Partnerships.

Opinion on other matter prescribed by the Companies Act 2006

In our opinion the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 as applied to Limited Liability Partnerships requires us to report to you if, in our opinion:

·; adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or

·; the financial statements are not in agreement with the accounting records and returns; or

·; we have not received all the information and explanations 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

15 February 2011

Company Number OC340174

STATEMENT OF COMPREHENSIVE INCOME

* The prior period comparatives have been restated. See Note 5 for further details.

All amounts relate to continuing operations.

The notes on pages 10 to 20 are an integral part of these financial statements

The financial statements were approved by the members and authorised for issuance on 15 February 2011 and signed on their behalf by:

On behalf of

Leeds Covered Bonds Designated Member (No.1) Limited

The accompanying notes are an integral part of this statement of financial position.

1. ACCOUNTING POLICIES

Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted for use in the European Union that are effective or available for early adoption at the Partnership's reporting date. The Partnership, in addition to complying with its legal obligation to comply with IFRSs as adopted for use in the European Union.

No new standards were effective in 2010 which had a material impact on the financial statements.

At the date of authorisation of these financial statements, the following standards and interpretations, which have not been applied in these financial statements were in issue but not yet effective:

IFRS 9 Financial instruments: Replacement of IAS 39 - Classification and Measurement.

Revised IAS 24 - Related party disclosures.

Improvements to IFRS 2010

IFRIC 19 - Extinguishing financial liabilities with equity instruments.

The Members anticipate that the adoption of these standard and interpretation in future periods may have a material impact on the Limited Liability Partnership's financial statements, although it is impractical to estimate the impact.

Principal accounting policies

These policies have been consistently applied during the year.

The Partnership prepares its accounts under the historical cost convention, except where financial assets and liabilities are held at fair value through profit and loss, and on the going concern basis as disclosed in the statement of going concern set out in the Report of the Directors.

Presentation of income statement

The nature of the business is obtaining funding and subsequently making advances to fellow group companies, as a result the directors are of the opinion that it is more appropriate to use 'Interest receivable' rather than 'Revenue' in presenting the Income Statement.

Income recognition

Interest income and expense on financial assets and liabilities held at amortised cost is measured using the effective interest rate method, which allocates the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument.

Taxation

Limited Liability Partnerships are not subject to UK taxation legislation.

Financial assets

i) Loan to originator

Under IAS 39 where a transfer of a financial asset by the transferor does not qualify for derecognition, the transferee does not recognise the transferred asset as its asset. Instead the transferee recognises a receivable from the transferor, and derecognises any cash or other consideration paid. Leeds Building Society has transferred to the Partnership various mortgage portfolios during the year. However, it is considered inappropriate for these to be derecognised by the Society as it has retained significant risks and rewards of ownership of these financial assets

1. Principal accounting policies (continued)

ii) Derivative financial instruments

The Partnership where it is deemed appropriate uses derivative financial instruments to hedge its exposure to foreign currency risk arising from its operational activities. The Partnership does not hold or issue derivative financial instruments for trading purposes. Initially derivative financial instruments are recognised at their fair value in the Income Statement. Subsequently derivatives are re-measured and any change in their fair value is recognised in the Income Statement, unless the derivative qualifies for hedge accounting. Where hedge accounting criteria are met any movements in the fair value of the derivative can be off-set in the Income Statement against the fair value movement of the risk being hedged.

iii) Cash and cash equivalents

For the purposes of the Balance Sheet and Cash Flow Statement, cash and cash equivalents comprise balances with less than three months' maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills, loans and advances to banks, amounts due from other banks and short term investments in securities.

Financial liabilities

Interest bearing loans and borrowings comprise a series of term advances from the Society, equivalent to the amounts raised by the Society under its covered bonds programme, held at their fair value. It is the responsibility of Leeds Building Society to record in its own financial statements the debt commitment arising from the issue of the covered bonds. However on the event of default by Leeds Building Society this obligation will transfer to the Limited Liability Partnership. The term advance represents this obligation. Included within the term advance is the value of two covered bonds issues that were released to external third parties, and one that was issued internally within the Group to Leeds Building Society, for the purpose of accessing the Bank of England Special Liquidity Scheme. The treatment of the internal issue has been changed in 2010 from the previous year. In 2009 the covered bond obligation (2009: £1.25bn) was not shown in the financial statements of the Limited Liability Partnership because the transactions associated with the issue were entirely intercompany in nature (see below) and as such were not recorded. However on issue of the externally delivered covered bonds this treatment is no longer appropriate and the value of this issue is included in the term advance so that the balance represents the true value of the Limited Liability Partnerships commitment.

Other financial liabilities are held at amortised cost, except where hedge accounting has been applied. Finance costs are charged to the Income Statement using the effective interest rate method.

Intercompany transaction

The intercompany transaction between Leeds Building Society, Leeds Building Society Covered Bonds LLP and the Partnership is part of a wider transaction for which the accounting is considered in its entirety. In 2009 as no cash or other consideration transferred to Leeds Building Society Covered Bonds LLP from the Partnership in relation to the intercompany loan transaction or the issue of the loan notes, no accounting entries were recorded for these transactions. However with the circulation of covered bonds in external markets by Leeds Building Society, and the recognition of the Limited Liability Partnerships obligation to repay these bonds in the event Leeds Building Soceity defaults via a term advance this treatment is no longer appropriate and intercompany transactions are recognised as a loan to originator.

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the Statement of Financial Position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

1. Principal accounting policies (continued)

Fair value hedges

A fair value hedge is used to hedge exposures to variability in the fair value of financial assets and liabilities, such as fixed rate term advances. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Income Statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of the hedged item is amortised to the Income Statement over the period to maturity.

If derivatives are not designated as hedges then changes in fair values are recognised immediately in the Income Statement.

Foreign currency

Assets and liabilities denominated in foreign currencies are translated into sterling at the relevant rates of exchange prevailing at the end of the year. Any arising exchange rate differences are dealt with in the Income Statement as they arise.

Related party transactions

Leeds Building Society, the Partnership's UK controlling undertaking is incorporated in Great Britain and registered in England and Wales. The administration, operations, accounting and financial reporting functions of the Partnership are performed by Leeds Building Society.

Related party transactions with group undertakings are detailed in their respective notes.

Segmental reporting

The Partnership operates in one business sector based upon the information the members' monitor and all of the Partnership's activities are in the UK.

2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Fair value of derivatives

The fair value of financial instruments that are not quoted in active markets are determined using valuation techniques. Where valuation techniques (for example models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them. All models are certified before they are used and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable data, however areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of financial instruments.

3. INTEREST RECEIVABLE AND SIMILAR INCOME

* The prior period comparatives have been restated. See Note 5 for further details.

4. INTEREST PAYABLE AND SIMILAR CHARGES

* The prior period comparatives have been restated. See Note 5 for further details.

5. PRIOR YEAR RESTATEMENT

5. PRIOR YEAR RESTATEMENT (continued)

In the prior year, the amount of interest receivable and payable by the Partnership was overstated. Interest receivable and interest payable for the year ended 31 December 2009 has been re-stated as a result of an interest rate re-calculation.

This restatement has the effect of reducing both interest receivable and interest payable for the year ended 31 December 2009 by £5,063,000 but this has no effect on the net interest receivable for 2009.

6. ADMINISTRATIVE EXPENSES

The audit fee for the current year has been paid on the Partnership's behalf by its UK controlling undertaking, Leeds Building Society, in accordance with Society policy, for which a recharge has been made. The audit fee for the current year (including irrecoverable VAT) is £500 (2009: £500).

7. MEMBERS AND emolumeNts

The members received no emoluments in respect of qualifying services during the year to 31 December 2010

(2009: nil).

The Partnership has no employees (2009: nil).

8. NET GAINS FROM FAIR VALUE VOLATILITY ON DERIVATIVE FINANCIAL INSTRUMENTS

9. LOAN TO ORIGINATOR

The loan to originator is due in over one year. See note 21 for further details.

10. DERIVATIVE FINANCIAL INSTRUMENTS

11. OTHER RECEIVABLES

12. Cash and Cash equivAlents

13. INTEREST BEARING LOANS AND BORROWINGS

Interest bearing loans and borrowings comprise a series of term advances from the Society, equivalent to the amounts raised by the Society under its covered bonds programme. Each term advance bears interest at a rate equal to the rate of interest payable on the corresponding series of covered bonds.

The Society will not be relying on repayment by the Partnership in part, or in full term advance or the interest thereon to meet its interest and repayment obligations under the covered bonds. The covered bonds are unconditionally guaranteed by the Society. The term advances will not be repaid by the Partnership until all amounts payable under the corresponding covered bond series have been repaid in their entirety. Any amounts owed by the Partnership are subordinated to amounts owed by the Partnership under the Priorities of payment Guarantee. Under this guarantee the Partnership's obligations constitute direct obligations and are secured against the assets from time to time of the Partnership and recourse against the Partnership is limited to such assets. The principal asset of the Partnership is its beneficial interest in the mortgage loans acquired from the Society. The Partnership has also provided a guarantee as to payments of interest and principal under the Covered Bonds programme Trust Deed, where amounts would otherwise be unpaid by the Society.

Where the Partnership enters into financial guarantee contracts to guarantee the indebtedness of other entities within its group, the Partnership considers these to be insurance arrangements and accounts for them as such. In this respect, the Partnership treats the above guarantee contract as a contingent liability until such time as it becomes probable that the Partnership will be required to make a payment under the guarantee. The amounts due to Leeds Building Society mature on the following dates:

13. INTEREST BEARING LOANS AND BORROWINGS (continued)

Interest bearings loans and borrowings are payable in over one year.

The table below summarises the main terms of the three covered bond issues:

14. amounts owed to CREDIT INSTITUTIONS

The Partnership has placed collateral received from an external counterparty on deposit with the Society of £2,178,000. The counterparty is not entitled to any interest receivable on such deposits.

15. OTHER PAYABLES

Deferred consideration is payable to Leeds Building Society in respect of the loans sold to the Limited Liability Partnership.

16. MEMBERS AND CAPITAL RESERVES

The average number of members during the year was 3 (2009: 3). Profit share is based upon members' legal capital balances.

17. ultimate controlling party and TRANSACTIONS WITH RELATED PARTIES

The Partnership considers the Society to be its ultimate controlling party, as it has the power to govern its financial and operating policies, and so obtain benefit from its activities.

The Partnership has provided a loan to the Society. See note 9 - Loan to originator for more details.

18. financial commitment

The Society has provided a financial commitment to the Partnership. From October 2009, the Society is required to buy back all defaulting mortgages from the Partnership once they reach three months in arrears. The Partnership does not suffer a loss on the buy back as it comprises all outstanding amounts including the arrears.

19. RISK MANAGEMENT AND POLICY CONTROL FRAMEWORK

The principal risks arising from the Partnership's financial instruments (both assets and liabilities) are market risk, liquidity risk and credit risk. The principal nature of such risks are summarised below:

Market Risk

Market risk is the risk that the value of a financial instrument will fluctuate due to movements in market factors. Market risk comprises the following types of risk: interest rate risk, currency risk, and operational risk. These risks are measured and managed at Group level in such a way as to maintain a neutral position.

·; Interest rate risk. This exposure is managed on a continuous basis, within limits set by the Board, using a combination of interest rate derivatives.

·; Currency risk. The Limited Liability Partnership minimises is exposure by matching, where possible, any foreign currency assets and liabilities, and through the use of cross currency swaps.

·; Operational risk is defined as 'the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events'. Operational services are provided by the Society. The Partnership places reliance upon the specific policies and procedures the Society has in place at group level to counteract this risk.

19. RISK MANAGEMENT AND POLICY CONTROL FRAMEWORK (continued)

Liquidity Risk

Liquidity risk is the risk that the Limited Liability Partnership, though solvent, either does not have sufficient financial resources available to meet its obligations as they fall due, or can only secure them at excessive cost. The Partnership's obligations only arise as a result of payments being received by it under intercompany loans. The Partnership cannot therefore be required to make any payments if insufficient cash is available and as such it does not face any liquidity risk.

The following table shows the gross contractual cash flows of the Limited Liability Partnership's financial liabilities:

Credit Risk

Credit risk is the risk of financial loss where counterparties are not able to meet their obligations as they fall due. For the reasons outlined above the exposure to loss as a result of credit risk is kept to a minimum, however the Partnership is exposed to credit risk via its loan to originator which is collateralised on the Limited Liability Partnerships beneficial interest in the Covered Bond mortgage portfolio. When the loans in the portfolio do not provide sufficient funds to cover the investment made by the Limited Liability Partnership, it has no superior claim on the assets of Leeds Building Society.

The Limited Liability Partnership's maximum exposure to credit risk is equal to the value in its investment in the mortgage portfolio of £1.5billion (2009: £1.8billion).

It is the responsibility of the Group's Credit Committee to formulate and monitor policy pertaining to asset quality and credit risk, with ultimate challenge and oversight resting with the Board. The Group is firmly committed to the management of this risk at all stages of the lending cycle. The Group monitors closely customer affordability and loan-to-value multiples at the application stage. It employs appropriate underwriting and fraud detection techniques to minimise losses once loans have been approve, and it also takes a proactive approach to the control of bad and doubtful debtors which is managed by a specialist team dedicated solely to the collections and recovery process. The Group continues to invest in developing and enhancing its arrears management strategies to minimise credit risk whilst ensuring that customers are treated fairly.

19. RISK MANAGEMENT AND POLICY CONTROL FRAMEWORK (continued)

The table below shows the arrears profile of the mortgage portfolio:

General UK economic factors, such as unemployment and problems in the housing market have a serious impact on credit risk, and these factors may affect some areas of the UK more than others (concentration risk). The mortgage portfolio's exposure to concentrate on risk is outlined in the table below:

20. CAPITAL MANAGEMENT AND FINANCIAL RESOURCES

Capital held by the Partnership and managed centrally as part of the Leeds Building Society group.

Capital is managed by way of processes set up at inception of the Partnership and subsequently there is no active process for managing its own capital. The Partnership is designed to hold minimum reserves once all amounts due have been received and amounts owing have been paid. The Partnership's capital is not externally regulated.

Risks such as interest rate risk and foreign exchange rate risk have an impact on the Partnerships capital. As discussed in the Members' Report these are managed by Leeds Building Society.

21. FINANCIAL INSTRUMENTS

The financial instruments of the Partnership comprise of a loan to the Society, cash, derivatives, borrowings and various receivables and payables that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Society.

The table below summarises the main financial instruments of the Partnership, their significant terms and conditions and the accounting treatment adopted.

A comparison of the Partnership's financial instruments book value and fair value has been provided below. Fair values have been determined using external market prices where available. When this data is not available internal pricing models have been used.

i. Loan to originator, other receivables, cash and cash equivalents, amounts owed to credit institutions, other payables and amounts due to members are recognised at amortised cost. This is considered to be a close approximation to fair value.

ii. Derivative financial instruments are determined using external market prices.

iii. The fair value of interest bearings loans and borrowings has been calculated using a discounted cash flow analysis.