Directors' report

Chairman and Chief Executive's introduction - Impairment of treasury assets

In common with other banks and institutions, we have invested a small proportion of our assets in slightly higher yielding and more complex instruments. At the time of our preclose statement, the Group held £125m of investments in structured investment vehicles ('SIVs'), and a further £140m holding in collateralised debt obligations ('CDOs') which have an element of exposure to the US subprime market. Of this CDO holding, including synthetic CDOs, £72m is the specific exposure to the US sub-prime mortgage market. Until the last quarter of 2007, no payment problems and no credit concerns had been encountered by these assets.

In the light of the recent problems with such assets, we have undertaken a careful analysis in order to identify those whose value has been permanently impaired. To our disappointment, we have concluded that £64.2m of our SIVs and £30.2m of our CDOs are impaired, and have charged these amounts to our Income Statement.