Annual Report & Accounts 2014 - Bath Building …...1! Chairman’sStatement)...
Transcript of Annual Report & Accounts 2014 - Bath Building …...1! Chairman’sStatement)...
Annual Report& Accounts 2014
DIRECTORS Robert Derry-‐Evans Chairman (as from 1 January 2015) Christopher M Smyth Vice-‐Chairman (as from 1 January 2015) Dorothy Ann Berresford Senior Independent Director (as from 1 January 2015) Richard D Jenkins Chief Executive Kevin A Gray Deputy Chief Executive Christopher W J Nott Denzil Stirk Angela Cha Christopher J L Moorsom Chairman until retirement on 31 December 2014 Terence J Fussell Vice-‐Chairman until retirement on 6 June 2014 David Coles (retired 19 January 2014) OFFICERS Tonia Lovell Head of Compliance and Society Secretary Mark Wiltshaw Head of Savings and Investments Steve Matthews Head of Mortgages PROFESSIONAL ADVISORS Bankers: NatWest Auditor: Deloitte LLP Bristol Internal Auditor: Baker Tilly Risk Advisory Services
2 Wellington Place Leeds LS14 AP
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Chairman’s Statement For the year ended 31 December 2014 I am pleased to report that the Society continues to perform very well in a rapidly changing market for financial services this year and achieving, once again, record levels of assets, reserves and profit. Group key performance indicators:
• Group reserves rose by 14.3% to £24m (2013: £21.0m); • Gross mortgage lending of £37.4m (2013: £38.6m) which helped increase the Society’s mortgage book by 4.1% to a record
level of £218.9m (2013: £210.2m); • Liquid assets reduced from 23.5% to 22.5% of shares and borrowings, with further liquid resources being available to the
Society from the Funding for Lending Scheme; • Group profit on ordinary activities before taxation rose by 37.4% to £3.8m (2013: £2.8m); • Assets of the Group increased by 2.5% to £279.4m (2013: £272.5m).
Whilst the overall UK economy has been picking up, one of the fastest-‐growing elements has been the housing sector. In 2014 the market saw sharp price rises in the first half -‐ particularly in London -‐ followed by a slowing of demand in the second half. Tougher new rules on borrowing in the form of the Mortgage Market Review have probably contributed to the slowdown and have certainly proved challenging to implement for many lenders. The reform of Stamp Duty that was announced by the Chancellor in his Autumn Statement was a welcome change that should help to stimulate demand once again in 2015 and beyond. Against this backdrop, the Society has continued to steadily grow its mortgage book, and it has been able to retain its distinctive position as a lender focused on the merits of each case rather than placing reliance on computerised decision-‐making. We are extremely mindful of the difficult position for savers with savings rates, already at record low levels as a result of low Bank of England interest rates, being pushed lower still by the availability of low-‐cost funding from the Government’s Funding for Lending Scheme. We continue to do all we can to offer competitive rates to our existing customers. Looking to the future We are aware that many customers are increasingly turning away from branch-‐based banking and are looking to other methods of managing their money, such as by phone or by using the internet via use of mobile devices such as tablets and smartphones. Some of these trends have been reflected in our own business and this has brought about the closure of our branch at Larkhall in 2014 as transactions had dipped to a level where maintaining a branch there was uneconomic and was not in the interests of the wider membership. We expect to have branch offices at Moorland Road in Oldfield Park and in the centre of Bath for many years to come, but we do believe that members’ interests will be well served if we increase our investment in technology to extend the range of accounts that can be operated online, and to facilitate the submission of mortgage applications over the internet. Values As a new member of the Board, I have been impressed by the ethos of the Society’s Board and Management and its focus on its members’ interests: the contrast of the Society’s approach to the reputation of the banking sector is striking. In the few months I have been involved with the Society, I have come to recognise it as a very special business in a market where automation and so-‐called “efficiency measures” have so often been deployed to the detriment of customers. The Society does offer a very real alternative to the major banks and it is gratifying to see that traditional standards of service and behaviour are valued and appreciated by so many of our customers. As a mutual Building Society, we have different priorities to a plc bank. Our focus tends to be longer term and, as your incoming Chairman, I am very aware that my responsibility and that of our Board is to run the Society such that we leave it in better shape than we found it.
Our past Chairman, Christopher Moorsom, who retired at the end of 2014 has done exactly that. Over the years of his chairmanship, the Society has developed in size, in strength and in resilience -‐ no mean feat in the face of the most exacting conditions that the industry has encountered in many generations. On behalf of his Board colleagues, and the staff and members of the Society, I wish him a happy and long retirement. He will be a tough act to follow. I would also like to take this opportunity to pay tribute to Terry Fussell who served as Society Vice-‐Chairman for many years before passing away in the summer of 2014. Terry was a tireless supporter of the Society who cared passionately about the interests of its members and the long-‐term success of the Society. He will be fondly remembered and greatly missed by all who worked with him. In replacing Chris and Terry, and to allow for some succession, the Society has taken on three new Non-‐Executive Directors, including myself. All of the new Directors will stand for election at the 2015 Annual General Meeting. I am excited to work with the newly constituted Board and very much hope to combine the fresh insight of new Board members with the expertise and experience of the established Executive and Non-‐Executive team. I am looking forward to serving the members in the months and years ahead. I would like to take this opportunity to thank all involved with the Society -‐ members, staff, suppliers and intermediaries -‐ for your continued support. Robert Derry-‐Evans Chairman 3 March 2015
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Chief Executive’s Review For the year ended 31 December 2014 Mortgages Following years in the doldrums, the mortgage market grew rapidly in 2013 and this strong growth continued into 2014. For various reasons, growth slowed as 2014 progressed but only back towards levels that are more sustainable over the longer term. Government initiatives in the form of the Help-‐to-‐Buy programmes and the Funding for Lending Scheme, which has offered cheaper funding to lenders seeking to grow their mortgage assets, have boosted the demand for and supply of mortgages. This has fuelled increases in house prices with virtually all parts of the UK seeing at least some modest growth in property values on a year-‐on-‐year basis. Whilst press comment focused on a bubble in house prices developing in London, price rises were more moderate elsewhere. The high levels of house prices in London have caused the Society to introduce measures to slightly restrict lending in the capital given the greater potential for a correction in the London market. A variety of ‘headwinds’ and ‘tailwinds’ have been at play in driving the housing market in recent years but a likely constraint to demand in the short term will be the fact that real wages have been falling. Moreover, the prospect of interest rate rises is making lenders and borrowers more wary, particularly given the tougher affordability rules introduced by the Financial Conduct Authority in 2014. By contrast, demand will be supported by the failure of the UK housing supply to match the rate of new household formation. Overall the Society expects that the mortgage market will remain reasonably buoyant in the next few years, and this will encourage an intensification of competition for the Society. The Society will strive to maintain its competitive position through innovation and development of its marketing capability and will resist the temptation to reduce its underwriting standards to attract business. The Society continues to fulfil a useful role in the market, using its manual underwriting approach to offer loans to creditworthy customers that sometimes find it difficult to obtain loans at acceptable rates from highly automated, computer-‐driven lenders. This particularly affects some buy-‐to-‐let customers, self-‐employed applicants, those building their own homes and some categories of first-‐time-‐buyers. In 2014, the Society reintroduced its insured 95% mortgage product specifically aimed at first-‐time-‐buyers and those moving to their second home. Some seven years ago we introduced our Buy-‐for-‐Uni mortgage aimed at students looking to purchase a home rather than rent whilst studying for their degree, and this mortgage remains a popular product offering loans up to 100%, with parental support. The Society has seen a reduction in the number of arrears cases through 2014. At the start of the year, 19 mortgages had arrears in excess of three months payments. By the end of the year this had fallen to 13 cases. As at the end of 2014 the Society had one property in possession (2013: two). Analysis continues to support the fact that a disproportionately large part of our arrears book comes from loans originated in the 2004-‐08 period which were adversely impacted by reductions in property values. The Society currently has no loans with arrears in excess of three months which were originated since 2012. Savings and funding In 2012, in common with many other Building Societies, the Society decided to join the Bank of England’s Funding for Lending Scheme. The scheme brought considerable benefits to the Society including cheap funding and recourse to contingency funds should this have been necessary. Whilst the Society qualified for substantially more funding from the scheme, as at 31 December 2014 it had drawn down only £17m of funds. In February 2015, the Society repaid £8.5m of funding back to the Bank of England. Further use of the draw down facility of the scheme will be subject to continuing management review. In the context of the Bank of England’s base rate remaining at 0.5% for much longer than most originally anticipated, our strategy has been to prioritise the relatively small amount of return available to existing savers and the Society remains committed to this approach while market rates are so low. Even though there is a general expectation that rates will gradually rise in the coming two to three years, it is likely that rates will remain below historic pre-‐2008 levels for some considerable time to come. Although the Society has periodically featured in best buy tables during 2014 it has long been the Society’s policy to offer consistent rates rather than to attract savers with “teaser” rates only to reduce them at the end of an initial period. A number of existing customers took advantage of the budget provisions announced by the Government to increase the amount allowed in a tax-‐free ISA to £15,000 which is due to be raised to £15,240 in April 2015. The Society continues to offer a wide variety of accounts to consumers, businesses, pension fund administrators, clubs and charities and trusts, and it considers the breadth of its funding base to be a source of strength. In the spring of 2014 the Society closed its counter at Larkhall, Bath. All of the Larkhall accounts were transferred to the Society’s Wood Street branch in the centre of Bath. This move reflects changing patterns of customer behaviour where the demand for direct accounts through the post and internet have increasingly displaced branch-‐based services. Property letting and financial advice At the end of 2014 the Society decided to sell its shareholding in Bath & City Financial Limited, a joint venture business that had been established with City Financial Planning Limited to offer independent financial advice. Over the years, Bath & City Financial Limited has helped hundreds of clients to take better control of their finances and has been able to offer the Society’s customers a greater range of financial services. The Society has withdrawn from financial advice to concentrate on its core business, but clients of Bath &
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Chief Executive’s Review (continued) For the year ended 31 December 2014 City Financial Limited will continue to be looked after by City Financial Planning Limited. The Society sold its shareholding in Bath & City Financial Limited for a sum equal to its initial investment in the business. Bath Property Letting Limited continues to provide letting services to landlords and tenants in and around Bath and is a wholly-‐owned subsidiary of the Society. Despite incurring an impairment charge of £2,648 (2013: £nil) against goodwill relating to purchased portfolios of properties, profit before tax for this business rose substantially to £121,349 (2013: £93,951) as a result of a strong performance in core letting activity. It remains the intention to grow this business through a combination of acquisitions and organic growth. Community involvement The Society has worked with a wide variety of local charities throughout the year. Through its Charity Awards Scheme, the Society aims to improve the lives of disadvantaged people by helping the good work of small local charities who often find it difficult to raise funds. In 2014, the Society donated £7,000 plus a number of hot air balloon tickets to a diverse range of nine charities. One of the Society’s main awards was for £1,000 to Bath Gateway Out and About, a charity founded to provide recreational opportunities to adults with learning disabilities. This charity was also nominated to become the Society’s Charity of the Year. Other charities benefiting from the awards included Keynsham and District Mencap, Greenlinks, and Bath FoodCycle. The Society also sponsored the annual fireworks at Bath Recreation Ground that is organised by The Rotary Club of Bath. The event was highly successful and raised approximately £20,000 for local charities. The Society’s sponsorship also incorporates the children’s Firework Safety Poster Competition designed to impart a lasting message about firework safety to the city’s children. This event will celebrate its 40th anniversary in 2015 and we are grateful to The Rotary Club of Bath for its sound management of this event. The Society was also involved in sponsoring Bath in Bloom in what was a major anniversary year for an event which has had an impressive track record over many decades. We congratulate the organisers on their excellent success and all involved in making Bath a visual summer delight. Dick Jenkins Chief Executive 3 March 2015
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Strategic Report For the year ended 31 December 2014 The Directors have pleasure in presenting the Strategic Report for the year ended 31 December 2014. Business objectives The principal objective of the Society is to be an excellent example of a local building society, possessing a secure and trusted brand that is backed up by consistently strong financial results. The Society aims to deliver steady growth in the level of its mortgage assets, primarily funding mortgage assets through retail deposits and by deposits from small businesses. The Society’s subsidiary company, Bath Property Letting Limited, provides property letting and management, a service considered complementary to the Society’s main business. Business strategy The Society’s main competitive advantage lies in its ability to apply traditional underwriting techniques to the assessment of prime mortgage cases that are complex in nature and that require a high level of personal input and work, but for which higher margins are appropriate. The Society’s strategy focuses on delivering strong profitability through offering a range of innovative mortgage products to customers who demand a personal and flexible mortgage service. The Society has taken advantage of the Bank of England’s Funding for Lending Scheme to fund net mortgage growth over 2013 and 2014. From 2015, the Society’s core plan is to revert to growing its funding base by applying its skills and expertise to expand all of its current funding distribution channels. Over the next strategic period to 2019, the Society’s strategy recognises that total funding from postal, internet and business channels is likely to grow faster than from its traditional retail channels. The niche nature of the Society’s business model is expected to require a relatively higher investment in people and systems than is the norm in the sector. Business review and future developments The Group’s business for the year and its future plans are reviewed by the Chairman and Chief Executive on pages 1 to 3. The Board of Directors principally monitors financial performance against five key performance indicators as defined below. ‘Mortgage Asset Growth’ is the percentage growth in the Group’s total of loans and advances to customers as measured between calendar year-‐ends, as stated in the Balance Sheets on page 21. ‘Profit Before Tax’ is the Group profit on ordinary activities before taxation as stated in the Income & Expenditure Accounts on page 20. ‘Management Expense Ratio’ is the percentage given by dividing the sum of Administrative Expenses plus Depreciation and Amortisation, as stated in the Income and Expenditure Accounts, by a calculation of the average of the total asset figures between current year-‐end and the prior year-‐end. ‘Core Equity Tier 1 Ratio’ is the percentage given by dividing Core Equity Tier 1 regulatory capital of £23,690,000 (2013: £20,725,000) by the sum of Group risk weighted assets and a regulatory measure for operational risk. ‘Leverage Ratio’ is the percentage given by dividing Group Tier 1 regulatory capital of £23,690,000 (2013: £20,725,000) by Group total assets as adjusted for mortgage pipeline commitments, off balance sheet interest rate swap exposures, and provisions for bad and doubtful debts. The Bank of England/Prudential Regulation Authority requires all UK banks and building societies to have a minimum leverage ratio of 4%. Key Performance Indicator 2014 2013 Mortgage Asset Growth 4.1% 8.7% Profit Before Tax £3,782,000 £2,753,000 Management Expense Ratio (excluding FSCS Levy) 1.34% 1.29% Core Equity Tier 1 Ratio 20.7% 17.7% Leverage Ratio 8.4% 7.5%
The Board’s budgetary aims for 2014 were to achieve modest growth in the Society’s total asset base, to convert excess liquidity into mortgage asset growth, and to concentrate on strengthening the Society’s capital base. The Board can confirm that the actual increase in total assets was within budgetary tolerances, and that the 4.1% growth in mortgage assets is considered very positive against a background of major regulatory change and an increase in competitive pressures. The management expense ratio increased on the previous year due to investment in more staff numbers across the Group and an increase in other administrative expenses. The Society’s most effective means of accessing new capital is through the retention of earnings. Political and regulatory pressure exists to encourage all banks and building societies to further improve their capital positions where they can. The Board is of the opinion that the level of 2014 profit performance is appropriate given the requirement to balance the Society’s status as a mutual organisation with the desire to achieve sufficient profitability that will allow the Society to continue to materially strengthen its capital position. The Group’s strengthening capital base is demonstrated by the significant increase in the Core Equity Tier 1 Ratio and the Leverage Ratio (both calculated on a consolidated basis). In 2014, the Society made net provisions against bad and doubtful debts of £222,000 (2013: £630,000) and utilised £390,000 (2013: £428,000) of provisions against crystallised losses. Total provisions decreased to £1,608,000 (2013: £1,768,000). Specific provisions of £200,000 (2013: £518,000) were made against four new and five existing arrears cases. The general provision decreased by £4,000 to £274,000 (2013: £278,000).
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Strategic Report (continued) For the year ended 31 December 2014 Business review and future developments (continued) Given the weakness of the economic recovery and the continuing fragile condition of the UK property market, the Board is expecting the Society to have to continue to make new provisions against bad and doubtful debts for some years ahead. As at 31 December 2014, the Society had four (2013: six) mortgage loans that were over 12 months or more in arrears. The total balance outstanding on these loans was £1,239,668 (2013: £1,285,733) and the total arrears outstanding was £132,350 (2013: £155,125). The Society has made specific provisions of £368,234 (2013: £602,178) against these loans. The Society uses certain forbearance techniques to help borrowers whose finances are stressed. These techniques include moving loans from a ‘capital and interest’ basis to an ‘interest-‐only’ basis, moving loans onto fixed rates of interest, acceptance of temporary reductions in mortgage payments and the active management of repossessed properties out of arrears. The impact of forbearing loans on the Society’s arrears position is fully considered before provisions are finalised for the year-‐end statutory accounts. The Board is of the opinion that the use of forbearance techniques has not had a material impact on the scale of the Society’s provisions for bad and doubtful debts. Capital Requirements (country-‐by-‐country reporting) Regulations 2013 The Capital Requirements (country-‐by-‐country) Reporting Regulations 2013 introduced reporting obligations for institutions within the scope of the European Union’s Capital Requirements Directive (CrD IV). Article 89 of the Capital Requirements Directive IV (CrD IV) requires credit institutions and investment firms in the EU to disclose annually, specifying, by Member State and by third country in which it has an establishment, the following information on a consolidated basis for the year ended 31 December 2014: EU Member State and/or third country
Nature of activities Turnover* Number of employees
Profit before tax Cash tax paid in 2014
Public subsidies
United Kingdom Deposit taking, Mortgage lending, Property management
£7,915,000 58 £3,782,000 £750,071 £nil
*Turnover is stated as Group total income as per income and expenditure account on page 20. Profit and capital The profit after tax transferred to the General Reserve was £2,942,000 (2013: £2,103,000). Gross capital at 31 December 2014 was £23,956,000 (2013: £21,014,000), representing the aggregate of the General and Revaluation Reserves. Free capital at 31 December 2014 was £21,396,000 (2013: £18,340,000), representing the aggregate of gross capital and general loss provisions for bad and doubtful debts less tangible fixed assets. At 31 December 2014 the ratios of gross capital and free capital, as a percentage of shares and borrowings, was 9.4% (2013: 8.4%) and 8.4% (2013: 7.3%) respectively. Principal risks and uncertainties The recent banking crisis and current economic conditions bring a range of risks and uncertainties to a small Building Society. Foremost amongst these are heightened levels of credit risk in the mortgage book and in the Society’s own treasury deposits with other institutions. Credit risk – treasury portfolio Credit risk in the treasury portfolio is primarily managed by limiting the maximum size of investments and by only investing directly with counterparties that are of a predetermined credit quality. The Society does not invest in structured investments. As part of its treasury credit risk control processes, the Board utilises the published data from international credit ratings agencies and also takes professional advice from treasury market experts. The Society does not believe that there is a current likelihood of a loss from direct exposure to any of its counterparties; however, the Society prudently limits its exposure to individual market counterparties to £1m but will place larger investments with the main UK clearing banks, the UK Government, the Bank of England and the European Investment Bank. The Society has no exposure to foreign banks and does not hold any investments denominated in Euros. Credit risk – residential mortgage book Credit risk in the mortgage book is controlled through stringent lending criteria where a focus is placed on ensuring that the quality of new lending remains high. The Board continuously monitors the level of arrears in the Society’s existing loan book and also how individual arrears cases are progressing. In common with all lenders, arrears levels are negatively impacted by rising unemployment and falling house prices. There remains great uncertainty as to whether the economy will continue to deliver sufficient growth to sustain the recent increase in employment and average property prices. The Society has generally experienced a low level of new residential arrears cases but it recognises that likely future increases in the Bank of England base rate would result in pressure to increase mortgage rates and that this could potentially increase the future level of loan arrears and defaults. In 2014, the Society did not dispose of any repossessed residential properties (2013: four). The occurrence of new residential arrears cases is slowing and the arrears situation on long-‐standing cases has stabilised. The Society has, however, provided for potential losses against a small number
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Strategic Report (continued) For the year ended 31 December 2014 Principal risks and uncertainties (continued) Credit risk – residential mortgage book (continued) of loans that were not in arrears as at 31 December 2014 but where an impairment alert had occurred and where losses are very likely due to particular circumstances and localised distressed property prices. The Society considers there to be a strong likelihood of it continuing to experience further material losses from its residential lending activities although these are expected to be within the Board’s appetite for credit risk. Credit risk – commercial mortgage book The Society engages in commercial lending although its current strategy is to reduce its commercial book as a proportion of total mortgage assets. Commercial risk appetite is regularly reviewed in light of economic and market conditions. Commercial lending is operated within a framework of conservative credit criteria, principally focusing on underlying income streams, debt servicing cover and property values. The Society operates stricter maximum loan-‐to-‐value rules for commercial lending than it does for lending on residential property. The Society maintains a preference for lending on commercial properties that have a secondary or alternative residential use. The Society will not lend on certain types of commercial property or fund development projects that are considered to be high risk or where it lacks some form of specialist commercial property knowledge. Commercial lending relationships are subject to regular reviews to ensure that facilities are fully performing and to identify cases of potential cause for concern, in order to facilitate early risk mitigation activity. The Society’s Credit Committee monitors a series of credit exposure limits which are aimed at producing a diversified commercial portfolio with minimal concentration risk. In 2014, the Society crystallised losses on the disposal of four repossessed commercial properties (2013: nil). In 2014, the Society reduced its overall exposure to commercial lending; however, it had to increase its provision against one long-‐standing commercial case that is in arrears by a further £13,387 to £195,897 (2013: £182,510). The Society considers there to be a likelihood of having to make further provision for losses on its commercial lending activities although the occurrence of new commercial arrears cases is slowing. Liquidity risk As a deposit-‐taking institution, the Society is mindful of the need to maintain a sufficient level of liquid assets to ensure the smooth operation of the Society’s business in normal and stressed economic circumstances. In 2014, the Society reduced its overall level of liquidity as a result of access to the Bank of England’s Funding for Lending Scheme. As at 31 December 2014, the Society had drawn £17m (2013: £8.5m) from the scheme in the form of UK Treasury Bills and these were held off balance sheet. In February 2015, the Society made £8.5m of early repayments back to the scheme. The Society held a further £13.5m (2013: £15m) on deposit with the Bank of England’s Reserve Account facility and a further £2m in supranational financial instruments. All of these investments are highly liquid and qualify towards the Society’s liquidity buffer which was significantly in excess of its minimum regulatory requirement at year-‐end. The Board has determined that in these uncertain times the Society should continue to focus on retaining existing funding and that it should seek to maintain relatively high levels of readily accessible liquidity. The Society considers there to be a low likelihood of it not having sufficient liquidity to meet intended requirements. Interest rate risk The Society holds treasury and mortgage assets that earn a fixed rate of interest to the Society. It also has funding liabilities that require the Society to pay interest on fixed rate terms. The Society is therefore exposed to the risk of market interest rates moving when certain of its assets and liabilities are on fixed rate terms. The Society regularly calculates its net exposure to interest rate risk and purchases interest rate swaps to reduce the Society’s overall exposure to interest rate gap. The Society considers there to be a low likelihood of incurring a loss from exposure to interest rate risk. Conduct risk As a regulated deposit-‐taker and mortgage lender, the Society risks regulatory censure and fines if its activities were ever deemed to be placing customers in situations which were to their significant detriment, were unfair or were unethical. The Society regularly examines its practices, procedures and processes with the objective of maintaining a business culture that always delivers the intended and most positive outcomes for the Society’s customers. The Society considers there to be a low likelihood of incurring losses through conduct risk. Nevertheless, as a reflection of the growing risk of operating in an environment where claims for compensation for mis-‐selling are increasing, the Society has prudently increased the Society’s provision for possible customer redress by £19,000 to £20,000 (2013: £1,000). Operational risk The Society is vulnerable to the risk of making losses from inadequate or failed internal processes or systems, human error, fraud or external events. Processes and systems are in place to minimise these risks. In 2014, the Society upgraded its automatic data back-‐up processes to its Information Technology recovery site outside the City of Bath. The Society considers there to be a low likelihood of incurring a material loss from operational risk. Uncertainties The future timing and scale of increases in the Bank of England base rate remains uncertain although the Board is of the opinion that the Bank of England’s base rate is likely to remain at 0.5% throughout most of 2015. A small rise in future interest rates would generally be beneficial to the Society as yield from the treasury portfolio would increase and, in the short term, the relative cost of current fixed rate funding would also fall. Large increases in future interest rates might, however, require the Society to narrow its margins in order to protect its borrowers. The Board also remains uncertain as to the scale of the Society’s future liability towards the Financial Services Compensation Scheme or to any future European initiative to pre-‐fund a replacement deposit protection scheme.
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Strategic Report (continued) For the year ended 31 December 2014 Principal risks and uncertainties (continued Uncertainties (continued) The final capital shortfall from the bail-‐out of the Bradford & Bingley is not known and neither is the impact from the bail-‐out of the Dunfermline Building Society. Risk management objectives and policies The Board of Directors has the objective of establishing a suitably robust control environment that successfully reduces the potential impact of risks that are present in the Society’s business. The control environment is designed to reduce both the probability of risks actually crystallising, and to reduce the impact of risks when they do crystallise. The Board of Directors has developed a Financial Risk Management Policy that deals with the procedures to reduce interest rate, liquidity and hedging risks; and a Lending Policy that dictates the procedures to reduce credit risk. The Society’s committee structure is specifically designed to monitor and control different aspects of risk on an ongoing basis. Furthermore, a Risk Committee exists to measure and appraise risk across the whole business and to keep the potential impact from risks that could crystallise as losses to within parameters set out in the Board’s stated risk appetite. A full disclosure of the Society’s policy for managing the risks associated with financial instruments is given in note 25 to the Notes to the Accounts on pages 32 to 34. R Derry-‐Evans Chairman 3 March 2015
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Directors’ Report For the year ended 31 December 2014 The Directors have pleasure in presenting the Report and Accounts for the year ended 31 December 2014. The Directors consider that the Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for members to assess the Group’s performance, business model and strategy. Creditors’ payment policy The Society’s policy is to pay trade creditors in accordance with agreed terms once such creditors have fulfilled all aspects of the contract. At the end of 2014 trade creditors outstanding represented 17 days of purchases (2013: 18 days). Asset encumbrance policy The Society’s policy is to permit the encumbrance of assets where this is required as a norm of standard market practices or where it is necessary to obtain central bank funding facilities or liquidity insurance. As a standard precondition of the Bank of England’s Funding for Lending Scheme, the Society prepositioned a portfolio of residential mortgage loans in 2013 with the Bank of England. Staff The Directors place on record their sincere appreciation of the commitment and dedication shown by the Group’s staff during the year. The professionalism and skill demonstrated across all aspects of the Group’s operations is a credit to all concerned and cannot be underestimated in the context of the success achieved. The Board maintains the view that the future of the Group will increasingly depend on a partnership between the Board, the staff and the Society members. To ensure that this is promoted, Directors will continue the policy of employing excellent people in all areas of the business. Auditor Deloitte LLP has expressed its willingness to continue in office and, in accordance with Section 77 of the Building Societies Act 1986, a resolution for its reappointment will be proposed at the Annual General Meeting. Directors’ responsibilities for preparing 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 Building Societies Act 1986 (‘the Act’) requires the Directors to prepare annual accounts for each financial year which give a true and fair view of the state of affairs of the Society and the Group as at the balance sheet date and of the income and expenditure of the Society and the Group for the year. In preparing those accounts, the Directors are required to: • Select appropriate accounting policies and apply them consistently; • Make judgements and accounting estimates that are reasonable and prudent; • State whether applicable accounting standards have been followed; and • Prepare the accounts on the going concern basis, unless it is inappropriate to presume that the Group will continue in business. In addition to the accounts, the Act requires the Directors to prepare, for each financial year, an Annual Business Statement and a Directors’ Report, each containing prescribed information relating to the business of the Society and its subsidiary undertakings. Directors’ responsibilities for Accounting Records and Internal Control The Directors are responsible for ensuring that the Group: • Keeps accounting records in accordance with the Building Societies Act 1986 or the Companies Act 2006 (as relevant); and • Takes 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.
Directors’ responsibilities to disclose information to auditors Each person who is a Director at the time when the Directors’ Report is approved must: • Ensure that there is no relevant audit information of which the Group’s auditors are unaware; and
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Directors’ Report (continued) For the year ended 31 December 2014 Directors’ responsibilities to disclose information to auditors (continued) • Ensure that all steps have been taken that ought to have been taken to make themselves aware of any relevant audit
information and to establish that the Group’s auditors are aware of that information. 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 also responsible for the integrity of the Society’s website www.bathbuildingsociety.co.uk. The work carried out by the auditor does not involve consideration of these matters and, accordingly, the auditor accepts no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Information published on the internet is accessible in many countries with different legal requirements relating to the preparation and dissemination of financial statements. Information in these financial statements is provided under the legislation of the United Kingdom. Going concern In the opinion of the Directors, the Group continues to deliver excellent results despite the uncertainty arising from the slow recovery from economic recession and the continuing requirement to make substantial provisions against potential losses on mortgage loans. The core profitability of the Society remains very strong, due to a combination of mortgage asset growth and successful management of margins. Profits from Bath Property Letting Limited were higher in 2014 than in the previous year. The property portfolio managed by Bath Property Letting Limited increased in 2014 due to a combination of improved organic growth and increased business from the company’s ‘let only’ service. The underlying profitability of the business continues to provide a source of diversified income that remains important to the overall performance of the Group. In the coming year, the Society expects to achieve similar growth in the level of its mortgage assets to that which it has achieved in 2014. Unlike 2013 and 2014, the Society does not intend to fund the majority of its planned growth in mortgage assets in 2015 from the Bank of England’s Funding for Lending Scheme but will instead rely on funding mortgage growth from current liquid resources and by increasing the Society’s base of shares and deposits primarily via retail channels and from local businesses. It does not expect to have to seek any wholesale funding from the money markets. The Board of Directors has conducted a recent review of going concern which has included a review of funding, liquidity and capital projections for a four-‐year period after the balance sheet date. This review indicates that the Society is likely to generate sufficient liquidity to fund expected mortgage growth whilst maintaining its current high levels of short-‐term liquidity throughout the period. With the Society now operating in an environment that includes access to Bank of England funding facilities, the Board has established a policy of maintaining the Society’s overall level of liquid resources above 20% of its total funding liabilities. The Board has stress-‐tested its planned liquidity and capital positions over a four-‐year period to 31 December 2018 to ensure that adequate capital and liquidity will be available throughout this strategic period. The Board is expecting the Society’s net margin to narrow once the economy starts to grow more rapidly and when competitors feel confident to seek market share via improved product pricing. Despite the prospect of narrower margins and lower profitability in future periods, the Board does, however, expect the Society to continue to deliver profits that will remain relatively strong when compared in a historical context and for the Society’s surplus of capital over the PRA’s Internal Capital Guidance requirement to continue to grow. Short of the negative impacts on the Society’s liquidity and capital positions that might be caused by major economic events such as the collapse of a major UK clearing bank, a ‘run’ on the whole UK banking system, or the occurrence of massive unemployment combined with further very large reductions in property values, the Board is confident that the Society will continue to have sufficient liquidity and capital available in future periods to permit the delivery of the Society’s strategic plan. The Board is of the opinion that measures taken in recent years by national governments and central banks throughout the world have made it unlikely that very serious economic events, of the nature mentioned, will occur. In common with all other banks and building societies, in 2010 the Society incorporated the requirements of the Prudential Regulation Authority’s regulations on liquidity risk management into its operations. This has involved building a substantial ‘liquidity asset buffer’ of exceptionally liquid assets with very strong institutions such as with the Bank of England and the UK Treasury. As at 31 December 2014, the Society’s liquidity asset buffer stood at £32.5m (2013: £25.5m). Short of the occurrence of a catastrophic economic event, the Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts. Directors The following persons served as Directors during the year: R D Jenkins, K A Gray, C W J Nott, D A Berresford , C M Smyth, R Derry-‐Evans, D Stirk and A Cha. D Coles retired from the Board on 19
January 2014. T J Fussell retired from the Board on 6 June 2014. C J L Moorsom retired from the Board on 31 December 2014.
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Directors’ Report (continued) For the year ended 31 December 2014 Directors (continued) In accordance with the Society’s rules, R D Jenkins and C M Smyth will retire from the Board at the Annual General Meeting. Being eligible, they offer themselves for re-‐election. R Derry-‐Evans, D Stirk and A Cha were all appointed on 16 June 2014 and will offer themselves for election at the Annual General Meeting. None of the Directors holds any shares in, or debentures of, any connected undertaking of the Group. On behalf of the Board R Derry-‐Evans Chairman 3 March 2015
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Report of the Directors on Corporate Governance For the year ended 31 December 2014 The Directors are committed to best practice in Corporate Governance. This report explains how the Society applies the principles in the UK Corporate Governance Code issued by the Financial Reporting Council in 2014. Although the Code does not directly apply to Mutual organisations, the Board has paid due regard to the Code and believes that the Society complies with all the Code provisions and industry guidelines, unless the contrary is stated. Code Principle: ‘Every company should be headed by an effective Board, which is collectively responsible for the success of the company.’ The principal functions of the Board are to provide leadership and challenge; set the Society’s strategy, policy and internal limits; ensure appropriate resources are available to meet objectives; ensure there are robust systems and controls in place; ensure the Society operates within its constitution, regulation and legislation; consider and if appropriate approve any proposed new initiatives; and review business performance against objectives. The Board Manual describes how decisions relating to these matters are reserved for the Board. The Board meets as often as necessary for the proper conduct of business (usually monthly). The attendance record is detailed at Table 1 on page 14. The Board has a minuted meeting at least once a year without the Executive Directors being present and at least once a year without the Chairman being present for the whole meeting. All Directors show clear commitment to the future success of the Society. Changes to the Society’s committee structures were introduced in June 2014 following the appointment of three new Non-‐Executive Directors and a subsequent review of governance arrangements by the whole Board. The Board takes an interest in all aspects of the business but delegates certain decisions and responsibilities to the following committees: Audit Committee: Constituted by three Non-‐Executive Directors – C W J Nott (Chairman), D A Berresford, C M Smyth (until June 2014). Following the appointment of new Directors, D Stirk became a member of the Audit Committee. Meetings are held at least four times per year and it is normal for executives and representatives from Deloitte LLP and Baker Tilly Risk Advisory Services (the Society’s external and internal auditors respectively) to attend by invitation. The Audit Committee has terms of reference that include all aspects of audit, compliance, risk and control and the review of changes to accounting standards that may affect the Society. The committee approves internal audit monitoring plans and assesses the adequacy of the audit and compliance functions. In 2014, subsequent to the introduction of the Mortgage Market Review, particular attention was paid to the Society’s systems of procedures and controls for testing mortgage affordability. Cyber and data security were also particular areas of focus in 2014, including close monitoring of the Society’s development of enhanced business continuity plans. The committee also confirmed the position of the Society’s Internal Auditors following Mutual One’s purchase by Baker Tilly and the subsequent change of name to that firm. The committee examined the adequacy of the Society’s accounting provisions to cover loan losses and payments to the FSCS. The committee also examined the risk from possible claims of mis-‐selling and the adequacy of customer redress provisions. In each of these areas the committee was provided with papers discussing key assumptions and issues, and any impacts on the accounts. These were reviewed in detail and discussed with the relevant Group staff and the results of this work were considered, together with the results of testing by the Auditor. The committee also considered whether the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for members to assess the Group’s performance, business model and strategy. The committee resolved to commend the Annual Report to the Board for approval. Nomination and Remuneration Committee: Constituted by two Non-‐Executive Directors – C W J Nott (Chairman) and T J Fussell until his retirement in June 2014. R Derry-‐Evans was appointed to the committee in June 2014 and A Cha was appointed to the committee in November 2014. C J L Moorsom also attended during 2014. The Nomination and Remuneration Committee has terms of reference that include senior appointments, remuneration, directors’ contractual terms and review of Board performance both collectively and individually. The Chief Executive attends meetings by invitation but none that relate to his remuneration. Credit Committee: This comprised two Non-‐Executive Directors until changes to the Society’s governance structure were implemented in June 2014. The changes saw the number of Non-‐Executive Directors reduced to one and the inclusion of all members of the Senior Management Team. C W J Nott and C Smyth were the participating Non-‐Executive Directors until June 2014, after which C Smyth continued as the sole Non-‐Executive appointment. The Chief Executive – R D Jenkins; Head of Mortgages – S Matthews; Society Secretary – T Lovell, and Senior Underwriter – C Powell constituted the rest of the committee until June 2014 when they were joined by Deputy Chief Executive – K A Gray (Chairman) and Head of Investments -‐ M Wiltshaw. The Credit Committee has terms of reference that include maintaining the quality of the Society’s mortgage book, oversight of the Society’s lending policy and underwriting. The committee reviews quarterly reports from the Head of Mortgages covering mortgage arrears and the volume and nature of exceptions to the lending policy. The committee also approves new underwriting mandates and gives approval for certain loans as specified in the Society’s lending policy. Assets and Liabilities Committee (ALCO): Until changes to the Society’s governance structure were implemented in June 2014, this committee was attended by two Non-‐Executive Directors; D A Berresford and T J Fussell (until his retirement in June 2014). Following the governance changes, D Stirk joined the committee as the sole Non-‐Executive Director. The Chief Executive – R D Jenkins (Chairman); Deputy Chief Executive – K A Gray; Head of Mortgages – S Matthews; Head of Investments – M Wiltshaw, and Society Secretary – T Lovell also attend the committee.
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Report of the Directors on Corporate Governance (continued) For the year ended 31 December 2014 The Assets and Liabilities Committee has terms of reference that include financial risk management and liquidity. The committee reviews monthly reports from the Deputy Chief Executive covering the ongoing management of interest rates, treasury investment strategy, asset encumbrance levels, Funding for Lending Scheme capacity and liquidity and hedging. The committee also recommends changes to the Society’s Financial Risk Management Policy to the Board. Risk Committee: Until the reorganisation of the Society’s governance structure in June 2014, this committee was made up of the following Non-‐Executive Directors -‐ C Smyth (Chairman), D A Berresford, C W J Nott and D Coles (retired 19 January 2014). All Non-‐Executive Directors became members of this committee following the reorganisation. The Chief Executive -‐ R D Jenkins, Deputy Chief Executive -‐ K A Gray and Society Secretary -‐ T Lovell are also members of the committee. The committee focuses on delivering the Society’s Risk Management Framework including reviewing the Society’s risk register, its risk appetite statement and its reverse stress-‐testing processes. The committee also approves the Society’s Recovery and Resolution Plan on an annual basis. Conduct and Operations Committee (formerly the Conduct and Treating Customers Fairly Committee): This committee was chaired by a Non-‐Executive Director -‐ D Coles, until his retirement in January 2014, thereafter the role of Chairman was filled by Chief Executive – R D Jenkins. Following the governance structure changes in June 2014, A Cha was appointed as the Non-‐Executive Director attendee and the Head of Investments – M Wiltshaw was appointed as Chairman. The Deputy Chief Executive – K A Gray, Head of Mortgages – S Matthews and the Society Secretary – T Lovell are also members of the committee. The Risk, Audit, and Nominations and Remuneration Committees all report directly to the Board of Directors whereas the ALCO, Credit and Conduct and Operations Committees all report to the Risk Committee. All committee terms of reference are available to members on request from the Society Secretary. The Senior Independent Director provides an alternative channel of communication for directors, staff and members and has responsibility for chairing meetings of the Board of Directors when the Society Chairman’s performance is being appraised. The role was performed by C W J Nott until 31 December 2014 until replaced by D A Berresford from 1 January 2015. The Society maintains liability insurance for all Board members. Board members have access to independent legal advice. Code Principle: ‘There should be a clear division of responsibilities at the head of the Society between the running of the Board and the Executive responsibility for the running of the Society’s business. No individual should have unfettered powers of decision’. The offices of Chairman and Chief Executive are distinct and are held by different people. The role of each is set out in their terms of appointment and service contract respectively. The Chairman is responsible for leading the Board, communication with members and ensuring that directors receive accurate, timely and clear information. The Chairman is independent. The Chief Executive is responsible for managing the Society’s business within the parameters set by the Board. Code Principle: ‘The Chairman is responsible for the leadership of the Board and ensuring its effectiveness on all aspects of its role.’ The Chairman sets the Board agenda with the Chief Executive and ensures that adequate time is available for all discussions. The Chairman promotes debate and challenge and ensures that there is contribution from all members of the Board. Code Principle: ‘As part of their role as members of a unitary Board, Non-‐Executive Directors should constructively challenge and help develop proposals on strategy.’ Non-‐Executive Directors challenge all strategic proposals and propose amendments where this is thought to be necessary. They regularly monitor management’s progress in delivering the annual operating plan. Through the Nominations and Remunerations Committee the Non-‐Executive Directors consider the performance of the Executive Directors, remuneration and succession planning. Code Principle: ‘The Board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the Society to enable them to discharge their respective duties and responsibilities effectively.’ At the year-‐end the Board comprised two Executive Directors and seven Non-‐Executive Directors (including the Chairman). The Board is of an appropriate size, with the necessary balance of skills and experience to meet the business needs. Code Principle: ‘There should be a formal, rigorous and transparent procedure for the appointment of new directors to the Board.’ The Nomination and Remuneration Committee considers the balance of skills and experience on the Board and the business requirements. Board composition and succession planning are regularly reviewed. Appointments are made on merit, against objective criteria and with due regard to the benefits of diversity on the Board. As at 31 December 2014, the Board consisted of nine directors (2013: eight) of which two were female (2013: one). All directors meet the tests of fitness and propriety laid down by the regulators and all directors are registered with the regulators as Approved Persons to fulfil their Controlled Function as a director. Letters of appointment relating to Non-‐Executive Directors are available for inspection on request.
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Report of the Directors on Corporate Governance (continued) For the year ended 31 December 2014 Code Principle: ‘All directors should be able to allocate sufficient time to the Society to discharge their responsibilities effectively.’ The Chairman’s job specification outlines the main role of the Chairman with regard to meetings and commitment. The commitment of Directors is assessed through annual appraisal with the Chairman. Code Principle: ‘All directors should receive induction on joining the Board and should regularly update and refresh their skills and knowledge.’ New directors receive induction training including: the nature of building societies, responsibilities and duties, interpretation of management information, the Society’s business and local market, overview of regulatory requirements and significant issues for the industry. Training is provided to the Board via management and external courses. Training and development needs are identified during appraisals. Code Provision: ‘The Board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.’ The Chairman ensures that the Board receives information in a timely way which is sufficient to enable it to fulfil its responsibilities. Code Principle: ‘The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its Committees and individual Directors.’ The Chairman follows a formal annual appraisal process for all Directors. The Senior Independent Director evaluates the Chairman, taking into account the views of other directors. The Nomination and Remuneration Committee reviews the findings of these appraisals. The Board formally considers its overall performance and that of the committees on an annual basis and performance is also discussed at a meeting of the Non-‐Executive Directors which is normally held in August. Code Principle: ‘All directors should be submitted for re-‐election at regular intervals, subject to continued satisfactory performance.’ All directors are submitted for election at the Annual General Meeting (AGM) following their first appointment to the Board. If any director has served for more than nine years or is 70 years or older, they will be submitted for re-‐election annually at the AGM. One third of directors retire by rotation and apply for re-‐election at the AGM. Directors are only submitted for re-‐election if the appraisal confirms their ongoing contribution and the Nomination and Remuneration Committee recommends re-‐election based on the specialist knowledge, skills, experience and independence of character of the individual director. Code Principle: ‘The Board should present a balanced and understandable assessment of the company’s position and prospects.’ The responsibilities of the directors in relation to the preparation of the Society’s accounts and the statement that the Society’s business is a going concern are contained in the Directors’ Report on pages 8 to 10. Code Principle: ‘The Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The Board should maintain sound risk management and internal control systems.’ The Board is responsible for determining appropriate strategies for risk management and control. The Board recognises compliance as a key part of the business and the Internal Auditor provides independent and objective assurance that processes are appropriate and effectively applied. The Society Secretary is responsible for risk control and provides guidance to the Board on this matter. The Board reviews key documents at least annually. These include the Lending Policy, Mortgage Forbearance and Arrears Policy, Financial Risk Management Policy; the Risk Management Framework (reflecting the Board’s risk appetite); Corporate Strategy; the Internal Capital Adequacy Assessment Process (ICAAP); the Internal Liquidity Systems Assessment (ILSA); the Board Manual. The risk register element of the Risk Management Framework is subject to ongoing review by the Board Committees and has been updated during the year to ensure the Board is satisfied that all significant risks are documented in a system of controls, which continues to be effective and appropriate to the nature, scale and complexity of the Society’s business in the current environment. Management takes responsibility for operating within the control framework. The register reflects the risk categories used in the Capital Requirement Directives, for example, credit risk (risk that a customer or counterparty will fail to meet their obligations to the Society as they fall due); operational risk (risk of a loss arising from inadequate or failed internal processes or systems, human error or external events); business risk (risk that the Society fails to meet the demands of its members as a whole); and liquidity risk (risk that the Society is not able to meet its financial obligations as they fall due, or can do so only at excessive cost). Key controls include segregation of duties and monitoring/reporting against Board approved limits. Code Principle: ‘The Board should establish formal and transparent arrangements for considering how it would apply the corporate reporting and risk management and internal control, and for maintaining an appropriate relationship with the Society’s auditor.’ The Board is satisfied that the Audit Committee includes members who have adequate, recent and relevant financial experience. The Society Chairman is not a member of the Audit Committee. The Audit Committee meets with the auditor, without the Executives present, after each meeting. Minutes of Committee meetings are distributed to all Board members and the Chairman of the Audit Committee reports to the Board. The main Audit Committee responsibilities are described on page 11.
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Report of the Directors on Corporate Governance (continued) For the year ended 31 December 2014 Deloitte LLP has served three years of an extended five year contract. Deloitte LLP has been the Society’s auditor for a total of 10 years. The firm was re-‐engaged as auditor in 2012 following a rigorous tender process at which its pitch for the audit was selected from those of other leading audit firms due to it being considered as offering the best and most cost-‐effective service to the Society. The Audit Committee operates a policy of retendering the audit contract a minimum of once every five years. In 2014, the Audit Committee approved the appointment of the auditor for the following non-‐audit engagements: £5,000 for tax advisory work (2013: £5,000), £5,000 for work re the Society’s participation in the Funding for Lending Scheme (2013: £9,600), £11,000 for consultancy on fair value adjustments for inclusion in the Society’s Recovery and Resolution Plan and £2,000 for other consultancy work (2013: £2,000). The Audit Committee conducts a formal annual review of the level and split of total fees to the auditor and it assesses whether auditor independence is being maintained. Following the last annual review, the Audit Committee considered that independence, effectiveness and objectivity were not being compromised by current arrangements. The Audit Committee reviews the effectiveness of the audit arrangements, the performance of the auditor, and the performance of the internal audit function after completion of each annual cycle. The Audit Chairman also liaises closely with the Chief Executive, Finance Director and the Head of Compliance to assess relationships and operational working practices. The ongoing effectiveness of the audit process is considered by the Audit Committee by way of a formal review of the Annual Audit Plan and by review of interim reports to the Committee. The Audit Committee assesses its own effectiveness by formally assessing the results from an annual Audit Effectiveness Questionnaire that is completed by all participants. Code Principle: ‘There should be a dialogue with shareholders based on the mutual understanding of objectives. The Board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.’ As a mutual organisation, the Society has a membership composed of individual customers. The Society proactively seeks the views of customers via questionnaires and requests for member feedback. All such feedback is considered at the Conduct and Operations Committee and contributes to the Society’s drive to improve outcomes for its customers. The Society is seeking ways to increase this dialogue in the future. Code Principle: ‘The Board should use the AGM to communicate with investors and to encourage their participation.’ Each year the Society sends details of the AGM, including the election of the directors, to all members eligible to vote. Members are encouraged to exercise their right to vote and are sent forms enabling them to appoint a proxy to vote for them if they cannot attend the AGM. At the AGM a presentation is given by the Society Chairman and Chief Executive covering the Society’s performance and current issues. A poll is called in relation to each resolution at the AGM, enabling all proxy votes to count. A scrutineer oversees the counting of votes at the AGM. Members of the Board are present at the AGM and are available to answer questions from the membership. Table 1: Attendance Record
Director Full Board Risk Audit Credit ALCO
Conduct and
Operations
Nomination and
Remuneration
C J L Moorsom (Chairman) 10/10 2/2 1/1 3/3 T J Fussell (Vice Chairman) – (retired 6 June 2014) 4/5 1/1 1/2 1/1 D A Berresford (Vice Chairman as from 16 June 2014) 10/10 3/3 4/4 2/2 C W J Nott (Audit Committee Chairman) 9/10 2/3 4/4 3/3 C M Smyth (Risk Committee Chairman) 10/10 3/3 2/2 4/4
R Derry-‐Evans (appointed 16 June 2014) (Chairman as from 1 January 2015) 5/5 2/2 D Stirk (appointed 16 June 2014) 5/5 2/2 2/2 2/2 A Cha (appointed 16 June 2014) 4/5 1/2 2/2 R D Jenkins (Chief Executive) 10/10 3/3 4/4 4/4 4/4 4/4 K A Gray (Deputy CEO and Finance Director) 10/10 3/3 3/3 1/1 4/4 2/2 (Number of meeting commitments actually attended / number of meeting commitments) On behalf of the Board R Derry-‐Evans Chairman 3 March 2015
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Report of the Directors on Remuneration For the year ended 31 December 2014 Unaudited information The following Report of the Directors on Remuneration will be put to an advisory vote of the members at the forthcoming Annual General Meeting. The Board is committed to best practice in its remuneration policy for directors. This report explains how the Society applies the principles in the UK Corporate Governance Code relating to remuneration. The Society complies with the code provisions as far as they are applicable to a mutual organisation unless the contrary is stated. Level and components of remuneration Code Principle: ‘Executive Director remuneration should be designed to promote the long-‐term success of the company. Performance related elements should be transparent, stretching and rigorously applied.’
The Society’s remuneration policy is to reward directors through salary according to their expertise, experience and contribution. The Society also carries out benchmarking against other comparable organisations. Executive Directors’ emoluments The remuneration arrangements for Executive Directors consist only of basic salary, annual bonus, pension and other benefits. The Executive Directors do not hold outside directorships that provide an income for the benefit of themselves. The Nomination and Remuneration Committee designs the Executive Directors’ bonus scheme to align the interests of Executive Directors with the interests of members and provide incentives that recognise corporate and personal performance. If a range of challenging personal and operational targets is achieved, R D Jenkins and K A Gray can achieve a bonus of 10% of basic salary. The Committee has the discretion to reward the Executive Directors with an additional bonus element equivalent to a maximum of 5% of basic salary if exceptional performance is deemed to be delivered. The Executive Directors benefit from a pension scheme whereby the Society contributes 12% of basic salary per annum to a money purchase scheme. In lieu of his entitlement to pension contributions, from 1 April 2014 R D Jenkins opted to receive a cash equivalent sum at no extra gross cost to the Society. The Society operates no final salary pension arrangements. Executive Directors receive other taxable benefits including a car. The aggregate amount of these benefits is included in Table 2. Executive Directors’ contractual terms Each Executive Director has a service contract with the Society, terminable by either party giving six months’ notice. Non-‐Executive Directors The level of fees payable to Non-‐Executive Directors is assessed by the Nomination and Remuneration Committee using information from comparable organisations. These fees are not pensionable. Non-‐Executive Directors do not participate in any bonus schemes and they do not receive any other benefits. Details of Non-‐Executive Directors’ emoluments are set out in Table 3. The terms of appointment letter for each Non-‐Executive Director specifies that either party giving one month’s notice may terminate the agreement. Procedure for determining remuneration Code Principle: ‘There should be a formal and transparent procedure for developing policy on Executive remuneration and for fixing the remuneration packages of individual Directors. No Director should be involved in deciding his or her own remuneration.’ C W J Nott, R Derry-‐Evans and A Cha constitute the Nomination and Remuneration Committee. It is responsible for setting Executive Director remuneration. In view of the increasing responsibilities and work load of Non-‐Executive Directors, the Committee approved a 6% rise for 2015. The Nomination and Remuneration Committee normally reviews basic salaries, annually, by reference to jobs carrying similar responsibilities in comparable organisations and local market conditions generally.
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Report of the Directors on Remuneration (continued) For the year ended 31 December 2014 Audited information Table 2: Executive Directors’ Emoluments
Basic salary
Salary in lieu of pension contributions
Annual bonus Benefits
Pension contributions
TOTAL 2014
2014 £ £ £ £ £ £ R D Jenkins 128,500 11,424 16,900 7,844 2,420 167,088 K A Gray 98,833 -‐ 13,000 7,785 11,860 131,478 TOTALS 2014 227,333 11,424 29,900 15,629 14,280 298,566
Basic salary
Salary in lieu of pension contributions
Annual bonus Benefits
Pension contributions
TOTAL 2013
2013 £ £ £ £ £ £ R D Jenkins 111,767 -‐ 20,272 7,484 13,412 152,935 K A Gray 85,767 -‐ 11,868 6,428 10,292 114,355 TOTALS 2013 197,534 -‐ 32,140 13,912 23,704 267,290 Table 3: Non-‐Executive Directors’ Emoluments (comprising fees only)
2014 £
2013 £
C J L Moorsom (Society Chairman until retirement 31 December 2014) 30,381 29,640 T J Fussell (Society Vice-‐Chairman until retirement 6 June 2014) 11,119 20,931 C W J Nott (Audit Committee Chairman) 21,122 20,607 D A Berresford 21,122 20,607 D Coles (retired 19 January 2014) 874 21,631 C M Smyth (Risk Committee Chairman, Society Vice-‐Chairman as from 1 January 2015) 21,122 20,607 A Cha (appointed 16 June 2014) 12,346 -‐ R Derry-‐Evans (appointed 16 June 2014, Society Chairman as from 1 January 2015) 14,816 -‐ D Stirk (appointed 16 June 2014) 12,346 -‐ A Harris (retired 25 April 2013) -‐ 6,629 TOTALS 145,248 140,652 On behalf of the Nomination and Remuneration Committee R Derry-‐Evans Society Chairman 3 March 2015
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Independent auditor’s report to the members of Bath Investment & Building Society
Opinion on financial statements of Bath Investment & Building Society
In our opinion the financial statements:
• give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Group’s and the Society’s affairs as at 31 December 2014 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.
The financial statements comprise Group and Society Income and Expenditure Accounts, Group and Society Balance Sheets, the Group Cash Flow Statement, the Group and Society Statement of Total Recognised Gains and Losses and the related notes 1 to 25. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
Going concern We have reviewed the directors’ statement contained within the Directors’ Report on page 9 that the group is a going concern. We confirm that:
• we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate; and
• we have not identified any material uncertainties that may cast significant doubt on the group’s ability to continue as a going concern.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s ability to continue as a going concern.
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. For all assessed risks described below, we tested the design and implementation of the associated key controls identified.
Risk How the scope of our audit responded to the risk Loan loss provisions The Group holds £1.6 million of impairment provisions at year-‐end (2013: £1.8 million) against total loans and advances to customers of £220.5 million (2013: £212.0 million). Determining impairment provisions against loans to customers is a judgemental area requiring an estimate to be made of the incurred loss within the residential mortgage and commercial lending portfolios. This requires the estimation of customer default rates, property values, sales costs, forced sale discounts, likelihood of repossession, and potential impairment indicators all of which may be sensitive to changes in the economic environment. Loan loss provision balances are detailed within Notes 9 and 12. Management’s associated accounting policies are detailed on page 25.
We challenged the appropriateness of management’s key assumptions used in the impairment calculations for loans and receivables, including the impairment trigger point, the estimation of property values, sales costs, forced sale discounts and the likelihood of repossession. This was achieved through: benchmarking against internal and external data, undertaking sensitivity analysis, review of credit committee minutes and case files and comparing historical levels of write-‐offs to provisions. We involved our IT specialists to test the accuracy of the provisioning models through independent re-‐calculation in accordance with the approved provisioning policy and at the same time assessed the completeness and accuracy of data used by the models.
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Independent auditor’s report to the members of Bath Investment & Building Society (continued)
Our assessment of risks of material misstatement (continued) Risk How the scope of our audit responded to the risk Revenue recognition We have identified the key risk as being the accurate calculation of fees and commissions on new mortgage products because it involves a manual process. The Group received £0.5 million (2013: £0.5 million) of fees and commissions during the year. Management’s associated accounting policies are detailed on page 26.
We performed testing of management’s design and implementation of controls over appropriate calculation of fees and commissions and also tested the accuracy of a sample of fees by agreement to original mortgage contracts. We involved our IT specialists to independently assess the completeness of the fees recognised.
Financial Services Compensation Scheme levy The Group holds a provision for the Financial Services Compensation Scheme (“FSCS”) levy of £0.1 million at year-‐end (2013: £0.1 million). Accounting for the levy is reliant on data extracted from the core savings system and involves making assumptions regarding the Group’s share of industry protected deposits. There is also uncertainty regarding the extent to which additional levies will be raised to cover future capital shortfalls on the loans to HM Treasury and therefore the extent of any contingent liabilities to be disclosed in the financial statements. Management’s associated accounting policies are detailed on page 33. Details of the provision are included in Note 19 with details of the contingent liability in Note 24a.
We challenged the accuracy and completeness of the provision for the FSCS levy by performing an independent calculation of the amount based on latest information published by the FSCS and internal data from the core savings system. In respect of the deposit balances guaranteed by the FSCS we have tested this balance through extraction of data from the core savings system with the support of our IT specialists. We also assessed and benchmarked the contingent liability disclosure in the annual report.
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Independent auditor’s report to the members of Bath Investment & Building Society (continued) Our assessment of risks of material misstatement (continued) Risk How the scope of our audit responded to the risk Funding for lending scheme The accounting treatment for the Group’s participation in the Funding for Lending Scheme requires a skilled input and oversight by management and thorough understanding of the terms of the transaction to ensure appropriate recognition, derecognition and fair value measurement of associated assets and liabilities. Further detail about the Scheme and encumbrance levels are noted on page 2 and 25.
We challenged management’s accounting treatment including verification to supporting documentation including original contracts and statements from the Bank of England. We also reviewed and benchmarked the disclosure of such transactions in the annual report including disclosed levels of encumbrance.
Valuation of Derivatives
As described in Note 25, the Society uses interest rate derivatives to economically hedge net interest rate risks arising from issuance of fixed interest rate products. The accounting framework applied requires the fair value of such derivatives to be disclosed rather than recognised on the balance sheet. The valuation of derivatives disclosed in Note 25 to the financial statements requires significant judgement to determine appropriate inputs. Such inputs include quoted market prices, but where these are not available, inputs such as interest rates, volatility, exchange rates, counterparty credit ratings and valuation adjustments. There is a risk that appropriate consideration and calculation methodologies are not applied resulting in incorrect valuations of the swaps. The fair value of derivatives totalled £60k liability at the year-‐end (2013: £121k liability).
We assessed the appropriateness of valuation techniques as set out on page 26 used to calculate the fair values of derivatives. We also used our financial instrument specialists to independently recalculate a sample of valuations.
The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee discussed on page 11.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. The accumulation of profits is critical to maintaining and building capital for regulatory purposes and allowing the Group to invest in activities for its members. We have therefore selected profit before tax as the benchmark for determining materiality. We have determined materiality by applying 5.0% of this benchmark. The reduction from 7.5% in the prior year has not impacted the way in which we assess the significant risk areas. We have changed the percentage applied to align more closely with other comparable societies. We determined planning materiality for the Group to be £182,000 (2013: £206,000) which represents 0.07% of total Group assets (2013: 0.08%). This was determined on the basis of profit before tax. We agreed with the Audit Committee that we would report to the committee all audit differences in excess of £3,200 (2013: £3,200), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
20
Independent auditor’s report to the members of Bath Investment & Building Society (continued)
An overview of the scope of our audit
As in the prior year, our group audit scope involved performing full audits on the Group’s parent and main subsidiaries which accounted for more than 99% of the Group’s net assets and profit before tax. These audits were performed directly by the group audit team and executed at levels of materiality applicable to each individual entity which were lower than group materiality and ranged from £18,125 to £182,000. At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining subsidiaries not subject to audit or audit of specified account balances.
Independent auditor’s report to the members of Bath Investment & Building Society (continued)
Opinion on other matters prescribed by the Building Societies Act 1986
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.
Opinion on other matters prescribed by the Capital Requirements (Country-‐by-‐Country Reporting) Regulations 2013
In our opinion the information given on page 5 for the financial year ended 31 December 2014 has been properly prepared, in all material respects, in accordance with the Capital Requirements (Country-‐by-‐Country Reporting) Regulations 2013.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Building Societies Act 1986 we are required 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. We have nothing to report in respect of these matters.
Our duty to read other information in the Annual Report
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:
• materially inconsistent with the information in the audited financial statements; or
• apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group acquired in the course of performing our audit; or
• otherwise misleading. In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.
21
Independent auditor’s report to the members of Bath Investment & Building Society (continued)
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of 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. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.
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.
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. In addition, we read all the financial and non-‐financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Stephen Williams ACA (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor, Bristol, United Kingdom 4 March 2015
22
Group SocietyNotes 2014 2013 2014 2013
£000 £000 £000 £000
Interest,receivable,and,similar,income 2, 10,3757 10,348, 10,3757 10,348,Interest,payable,and,similar,charges 3, (3,129) (3,992) (3,129) (3,992)Net7interest7receivable 7,2467 6,356, 7,2467 6,356,
Fees,and,commissions,receivable 5327 496, 117 11,Fees,and,commissions,payable (142) (146) (142) (146)Other,operating,income 4, 2797 330, 2707 322,Total7income 7,9157 7,036, 7,3857 6,543,
Administrative,expenses 5, (3,454) (3,243) (3,110) (2,909)Depreciation,and,amortisation (249) (257) (217) (223)Other,operating,charges (10) (8) (9) (7)Operating7profit7before7provisions 4,2027 3,528, 4,0497 3,404,
Movement,in,provisions,for,bad,and,doubtful,debts 9, (222) (630) (222) (630)Impairment,loss,on,purchased,goodwill,in,subsidiary 14, (3) L, G7 G7Movement,in,provisions,for,liabilities,L,customer,redress 19, (19) L, (19) L,Movement,in,provisions,for,liabilities,L,FSCS,Levy,charge 19,24 (166) (145) (166) (145)
3,7927 2,753, 3,6427 2,629,
Net,(loss)/profit,on,disposal,of,subsidiary 13, (10) L, 257 L,Operating7profit7and7profit7on7ordinary7activities7before7tax 3,7827 2,753, 3,6677 2,629,
Tax,on,profit,on,ordinary,activities 8, (828) (635) (797) (617)Equity,minority,interest 21, (12) (15) G LProfit7for7the7financial7year 20, 2,9427 2,103, 2,8707 2,012,
Notes 2014 2013 2014 2013
£000 £000 £000 £000Profit,for,the,financial,year 2,9427 2,103,,,,,,,, 2,8707 2,012,Unrealised,gain,on,revaluation,of,fixed,assets 20, G7 69,,,,,,,,,,,,, G7 69,,,,,,,,,,,,,
The above results all arise from the Group's principal activities in the United Kingdom. In 2014, the Society disposed of its majority shareholding in Bath & CityFinancial Limited. The operations of this subsidiary company were immaterial to the Group and as such the above consolidated Group results have been statedas,though,they,were,derived,from,continuing,operations.
STATEMENT7OF7TOTAL7RECOGNISED7GAINS7AND7LOSSESSocietyGroup
Total,recognised,gains,relating,to,the,year 2,9427 2,172,,,,,,,, 2,8707777777777777 2,081,,,,,,,,
Notes 2014 2013 2014 2013
£000 £000 £000 £000Profit,for,the,financial,year,before,taxation 3,7827777777777777 2,753,,,,,,,, 3,6677777777777777 2,629,,,,,,,,
NOTE7OF7HISTORICAL7COST7PROFITS7AND7LOSSESGroup Society
Gain,on,fixed,asset,revaluation,written,back,against,revaluation,deficit,of,previous,years,, G7 (65) G7 (65)Depreciation,on,revalued,element,of,fixed,assets 20, 377777777777777777777 9,,,,,,,,,,,,,,, 377777777777777777777 9,,,,,,,,,,,,,,,Historical,cost,profit,for,the,financial,year,before,taxation,and,minority,interest 3,7857 2,697, 3,6707 2,573,
The,notes,on,pages,25,to,36,form,part,of,these,accounts
The above results are all derived from continuing operations. Profit on ordinary activities before tax represents operating profit as defined by FRS3 Reporting Financial Performance.
INCOME7&7EXPENDITURE7ACCOUNTS7FOR7THE7YEAR7ENDED7317DECEMBER720147
23
Group SocietyNotes 2014 2013 2014 2013
£000 £000 £000 £000
ASSETSLiquid9AssetsCash*in*hand 119 145 118 145Balances*with*the*Bank*of*England 13,500 15,000 13,500 15,000Loans*and*advances*to*credit*institutions 10* 41,468 41,668 41,202 41,460Debt*securities*issued*by*other*borrowers 11* 2,010 2,004 2,010 2,004
57,097 58,817 56,830 58,609Loans9and9advances9to9customersLoans*fully*secured*on*residential*property 199,607 189,640 199,607 189,640Loans*fully*secured*on*land 19,245 20,558 19,245 20,558
12* 218,852 210,198 218,852 210,198InvestmentsInvestments*in*subsidiary*undertakings 13* F9 F9 252 253Intangible9fixed9assets 14* 266 289 F9 F9Tangible9fixed9assets 14* 2,834 2,952 2,806 2,930Deferred9tax9asset 15* 49 449 50 42*Prepayments9and9accrued9income 264 241 245 213Total9Assets 279,362 272,541 279,035 272,245
LIABILITIESShares 16* 188,286 188,223 188,286 188,223Amounts9owed9to9other9customers 17* 65,892 62,149 65,994 62,249Other9liabilities 18* 919 871 763 703Accruals9and9deferred9income 192 162 183 148Provisions9for9liabilities 19* 117 100 117 100
255,406 251,505 255,343 251,423
Revaluation9reserve 20* 428 431 428 431General9reserves 20* 23,528 20,583 23,264 20,391Minority9interests 21* F9 22* F9 F9Total9Liabilities 279,362 272,541 279,035 272,245
Approved*by*the*Board*of*Directors*on*3*March*2015*and*signed*on*its*behalf*by:
R*DerryNEvansChairman
C*M*SmythViceNChairman
R*D*JenkinsChief*Executive
The*notes*on*pages*25*to*36*form*part*of*these*accounts
BALANCE9SHEETS9AS9AT9319DECEMBER920149
*
The notes on pages 19to 31 form part of these accounts
24
2014 2013£000 £000
Net)cash)outflow)from)operating))activities)(see)below) (3,365) (2,411)Taxation (750) (640)Capital)expenditure))))Purchase)of)fixed)assets (120) (153))))Sale)of)fixed)assets 1- .-Net)(purchase))of)debt)securities (5) .-Decrease)in)cash (4,239) (3,204)
2014 2014 2013 2013£000 £000 £000 £000
Reconciliation-of-operating-profit-to-net-cash---outflow-from-operating-activitiesProfit)on)ordinary)activities)before)tax 3,782- 2,753)Consolidated)profit)from)subsidiary)business)sold)prior)to)year)end (31) .-(Increase)/decrease)in)prepayments)and)accrued)income (37) 30)Increase)in)accruals)and)deferred)income 30- 29Increase/(decrease))in)provisions)for)liabilities 17- (14)Goodwill)impairment) 3- .-Charge)for)provisions)for)bad)and)doubtful)debts 222- 630)Charge)for)provisions)for)suspended)interest)on)impaired)loans 18- 17Depreciation)and)amortisation 249- 257)Net)cash)inflow)from)trading)activities 4,253- 3,702
Net)increase)in)loans)and)advances))to)customers (8,894) (17,426)Net)increase)in)shares 63- 7,324)Net)increase/(decrease))in)amounts)owed)to)other)customers 3,743- (7,091)Net)(increase)/decrease)in)loans)and)advances)to)credit))institutions (2,500) 11,000)Net)(decrease)/increase)in)other)liabilities (30) 80)
(7,618) (6,113)Net)cash)outflow)from)operating)activities (3,365) (2,411)
Reconciliation-of-cash-balances 2013 Cash)flow 2014£000 £000 £000
Cash)in)hand)and)balances)with)the)Bank)of)England 15,145) (1,526) 13,619-Loans)and)advances)to)credit)institutions)))S)repayable)on)demand 39,650) (2,713) 36,937-
54,795) (4,239) 50,556-
The)Society)has)taken)advantage)of)the)exemption)in)FRS1,)“Cash)Flow)Statements”,)which)provides)that)where)an)entity)is)a)member)of)a)group)and)a)Consolidated)Cash)Flow)Statement)is)published,)the)entity)does)not)have)to)prepare)a)Cash)Flow)Statement.
GROUP-CASH-FLOW-STATEMENT-FOR-THE-YEAR-ENDED-31-DECEMBER-2014-
-)
25
1. Accounting+policies
The$Group$balance$sheet$consolidates$the$assets$and$liabilities$of$the$Society$and$its$remaining$subsidiary$undertaking,$Bath$Property$Letting$Limited,$which$also$has$a$31$December$yearAend.$$The$Group$income$and$expenditure$account$consolidates$the$complete$2014$income$and$expenditure$accounts$of$the$Society$and$Bath$Property$Letting$Limited$plus$the$income$and$expenditure$accounts$of$Bath$&$City$Financial$Limited$to$30$November$2014,$after$which$the$Society's$investment$in$this$subsidiary$business$was$disposed$of.$$In$the$Society’s$accounts$the$investments$in$subsidiary$undertakings$are$stated$at$cost,$less$any$provisions$for$impairment.
Tangible+fixed+assetsTangible$fixed$assets$are$stated$at$cost$or$valuation,$less$accumulated$depreciation$and$any$provision$for$impairment.$Depreciation$is$provided$on$all$tangible$fixed$assets,$other$than$freehold$land,$at$rates$calculated$to$write$off$the$cost$or$valuation,$less$estimated$residual$value,$of$each$asset$on$a$straightAline$basis$over$its$useful$life,$as$follows:
25%$per$annum
NOTES+TO+THE+ACCOUNTS
The$following$accounting$policies$have$been$applied$consistently$in$dealing$with$items$which$are$considered$material$in$relation$to$the$accounts.
Basis+of+preparationThe$accounts$are$prepared$under$the$historical$cost$convention$as$modified$by$the$revaluation$of$certain$fixed$assets$and$in$accordance$with$the$Building$Societies$(Accounts$and$Related$Provisions)$Regulations$1998,$and$applicable$United$Kingdom$accounting$standards$issued$by$the$Accounting$Standards$Board.$As$noted$in$the$Directors’$Report$on$page$8,$the$Directors$are$satisfied$that$the$Group$has$adequate$resources$to$continue$in$business$for$the$foreseeable$future.$For$this$reason$they$continue$to$adopt$the$going$concern$basis$in$preparing$the$accounts.$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
FOR+THE+YEAR+ENDED+31+DECEMBER+2014
Basis+of+consolidation
25%$per$annum
Provisions+for+bad+and+doubtful+debtsThe$creation$of$impairment$provisions$for$a$portfolio$of$mortgage$loans$is$inherently$uncertain$and$requires$the$exercise$of$a$significant$degree$of$judgement.$$The$calculation$requires$significant$judgement$to$be$exercised$in$predicting$future$economic$conditions$(e.g.$interest$rates$and$house$prices)$and$customer$behaviour$(e.g.$likelihood$of$default).
Liquid+assets
Specific$provisions$are$made$based$on$calculations$of$the$irrecoverable$amount$of$individual$loans$and$advances$that$are$three$months$or$more$in$arrears$at$the$balance$sheet$date.
16.7%$per$annumSummit$computer$system$implementation$costs
Fixtures$and$fittingsComputer$equipmentMotor$vehicles
10%$A$20%$per$annum
1%$per$annumterm$of$lease
General$provisions$are$made$against$all$loans$that$have$not$been$considered$for$specific$provisions.$$Loans$that$are$fully$secured$on$residential$property$have$provisioning$rates$of$0.25%$or$0.5%$applied$to$the$respective$proportion$of$each$loan$that$is$under$80%$loan$to$value$or$over$80%$loan$to$value.$$Loan$to$values$are$calculated$based$on$estimations$of$current$market$values.$$General$provisions$are$also$made$against$similar$loans$that$are$fully$secured$on$land$using$the$same$basis$but$using$provisioning$rates$of$either$0.5%$or$0.75%.
Provisions$are$made$to$reduce$the$value$of$loans$and$advances$to$the$amount$that$the$Directors$consider$is$likely$to$be$recoverable$based$on$formal$valuations$where$they$are$considered$relevant.$$
Debt$securities$intended$for$use$on$a$continuing$basis$in$the$Society’s$activities$are$classified$as$financial$fixed$assets$and$are$stated$at$cost.$$Premiums$and$discounts$arising$on$the$purchase$of$a$financial$fixed$asset$are$amortised$over$the$period$to$the$maturity$date$of$the$security.$$Any$amounts$so$amortised$are$charged/(credited)$to$the$income$and$expenditure$account$for$the$relevant$financial$years.$$Where$there$is$an$impairment$in$value$of$a$financial$fixed$asset,$a$provision$is$made$to$write$down$the$cost$of$the$security$to$its$recoverable$amount.
Freehold$buildingsLeasehold$improvements
Funding+for+Lending+SchemeThe$Bank$of$England's$Funding$for$Lending$Scheme$takes$the$form$of$a$collateral$swap.$$The$Society$has$pledged$collateral$to$the$Bank$of$England$in$the$form$of$a$pool$of$mortgage$loans$in$exchange$for$collateral$from$the$Bank$of$England$in$the$form$of$UK$Treasury$bills.$$The$Bank$of$England$determines$the$quantity$and$quality$of$loan$collateral$that$must$be$provided$by$the$Society$and$it$can$request$early$repayment$of$its$Treasury$bills$if$sufficient$collateral$is$not$made$available$to$the$bank.$$Until$such$time$as$Treasury$bills$from$the$scheme$are$monetised$by$the$Society,$either$by$outright$sale$or$via$use$of$sale$and$repurchase$agreements,$no$assets$or$liabilities$are$recognised$on$balance$sheet.$$If$Treasury$bills$are$monetised,$the$resulting$cash$assets$are$recognised$on$balance$sheet$together$with$the$corresponding$funding$liabilities.$$As$at$31$December$2014,$the$Society$had$recognised$£nil$(2013:$£nil)$on$balance$sheet$relating$to$the$Funding$for$Lending$Scheme.
A$revaluation$of$individual$freehold$and$leasehold$properties$is$performed$every$five$years$with$an$interim$revaluation$carried$out$in$the$third$year$after$the$full$revaluation.$$Properties$used$in$the$Group$businesses$are$valued$using$an$existing$use$value$basis.$$Properties$that$are$surplus$to$the$Group$businesses$are$valued$using$a$market$value$basis.$$An$annual$impairment$test$is$also$performed$on$tangible$fixed$assets$that$have$an$estimated$remaining$useful$life$exceeding$50$years.$$The$surplus$or$deficit$on$revaluation$is$transferred$to$the$revaluation$reserve,$except$where$a$deficit$is$in$excess$of$any$previously$recognised$surplus$over$depreciated$cost$relating$to$the$same$property,$or$the$reversal$of$such$a$deficit,$when$the$amount$is$charged$(or$credited)$to$the$income$and$expenditure$account.
Intangible+fixed+assetsThe$acquisition$by$Bath$Property$Letting$Limited$of$portfolios$of$property$owning$landlords$creates$an$intangible$asset$in$the$consolidated$Group$balance$sheet$in$the$form$of$purchased$goodwill.$$The$amount$attributed$to$purchased$goodwill$is$initially$calculated$as$the$difference$between$the$fair$value$of$consideration$given$and$the$fair$values$of$the$separable$net$assets$acquired.$$Purchased$goodwill$is$amortised$over$a$period$of$twenty$years,$this$being$the$directors'$best$estimate$of$the$maximum$expected$life$of$purchased$portfolios.$$An$annual$impairment$review$of$goodwill$is$undertaken$and$deficits$are$taken$to$the$income$and$expenditure$account$where$events$or$changes$in$circumstances$indicate$that$its$carrying$value$may$not$be$recoverable$in$full.
Revaluation+of+properties
26
Fees$and$commissions$receivableFees$generated$from$landlords$and$tenants$within$Bath$Property$Letting$Limited$are$recognised$on$a$cash$received$basis.$$Fees$and$commissions$generated$within$
Bath$&$City$Financial$Limited$are$recognised$on$a$'work$in$progress'$basis$once$advised$sales$go$on$cover$with$product$providers.$$Commissions$received$by$the$
Society$relating$to$a$transferred$back$book$of$homes$and$contents$insurance$policies$are$recognised$on$a$receipts$basis.
Fees$and$commissions$payableCommissions$payable$by$the$Society$to$investment$agents$and$investment$introducers$are$calculated$on$an$accruals$basis.
Other$operating$incomeOther$operating$income$shows$the$net$of$other$fees$receivable$and$payable$on$core$and$non$core$activities$not$otherwise$disclosed$within$fees$and$commissions$
receivable$and$payable.$$Mortgage$application$fees$are$recognised$on$a$cash$received$basis.$$Mortgage$arrangement$fees$and$broker$procuration$fees$are$recognised$
at$the$point$mortgages$advance.$$Property$valuation$fees$and$charges$relating$to$individual$valuations$are$matched$against$each$other$on$an$accruals$basis.
Pension$costs
The$Society$uses$forbearance$techniques$to$help$some$borrowers$through$periods$where$their$finances$have$become$stressed$and$where$the$servicing$of$their$
normal$mortgage$commitments$has$become$difficult.$$Definitions$of$forbearance$are$consistent$with$the$FSA’s$paper$entitled$‘Forbearance$and$Impairment$
Provisions$J$Mortgages’$issued$in$October$2011.$$As$a$result$of$this$paper,$the$arrears$management$section$of$the$Society’s$Mortgage$Department$now$maintains$
forbearance$information$which$is$reported$regularly$to$the$Society’s$Credit$Committee.$$In$2014,$thirteen$accounts$(2013:$ten)$with$balances$totalling$£2,273,648$
(2013:$£1,731,082)$in$value$were$granted$forbearance$concessions.$$As$at$31$December$2014,$thirteen$accounts$(2013:$ten)$with$balances$totalling$£3,174,088$(2013:$
£1,731,082)$remained$on$special$payment$arrangements$plus$a$further$eleven$accounts$(2013:$three)$with$balances$totalling$£1,917,670$(2013:$£361,358)$remained$
on$concessionary$interest$only$terms$following$the$occurence$of$impairment$alerts.$$The$Society$takes$full$consideration$of$the$impact$on$its$arrears$position$from$
using$these$forbearance$techniques$and$the$potential$for$losses$on$these$accounts$is$assessed$and$considered$in$the$level$of$overall$provisions$held$against$the$
mortgage$portfolio.
Taxation
Forbearance
Income$from$subsidiary$business
The$Society$takes$in$deposits$from$retail$customers$and$corporate$investors$in$order$to$fund$its$mortgage$activities.$$Interest$payable$on$deposits$is$accrued$on$a$daily$
basis$and$capitalised$to$customers'$balances$on$either$31$December$each$year$or$on$the$date$of$maturity$for$fixed$rate$bond$products.
LeasingAll$payments$under$operating$lease$contracts$are$charged$to$the$income$and$expenditure$account$on$a$straightJline$basis$over$the$period$of$the$lease.$$
Current$tax,$including$UK$corporation$tax,$is$provided$at$amounts$expected$to$be$paid$(or$recovered)$using$the$tax$rates$and$laws$that$have$been$enacted$or$
substantively$enacted$by$the$balance$sheet$date.$$In$accordance$with$FRS19,$deferred$taxation$is$provided$in$full$on$timing$differences$which$represent$an$asset$or$
liability$at$the$balance$sheet$date,$at$rates$expected$to$apply$when$they$crystallise$based$on$current$tax$rates$and$law.$$Timing$differences$arise$from$the$inclusion$of$
items$of$income$and$expenditure$in$taxation$computations$in$periods$different$from$those$in$which$they$are$included$in$the$financial$statements.$$Deferred$tax$assets$
are$recognised$to$the$extent$that$it$is$regarded$as$more$likely$that$not$that$they$will$be$recovered.$$Deferred$tax$assets$and$liabilities$are$not$discounted.
The$Society$operates$an$externally$managed,$defined$contribution$Group$personal$pension$scheme$in$respect$of$staff,$under$which$the$costs$of$the$Society’s$
contributions$are$charged$to$the$income$and$expenditure$account$in$the$year$in$which$the$pensionable$salary$is$earned.
Incentives$to$borrowers
Derivative$financial$instruments
The$Society$operates$schemes$under$which,$as$an$incentive$to$borrowers,$discounts$in$the$form$of$cashback$and$interest$are$given.$$It$is$the$Society’s$policy$that$all$
such$sums$given$as$cashbacks$under$this$scheme$are$written$off$to$other$operating$charges$when$incurred.$$Sums$given$in$the$form$of$interest$discount$are$
recognised$against$interest$receivable$as$incurred.
Trading$and$nonJtrading$income$generated$within$Bath$Property$Letting$Limited$is$recognised$when$rents$and$charges$are$collected$from$tenants$and$landlords,$and$
when$commissions$are$collected$from$service$suppliers.$$The$trading$income$from$the$subsidiary$company$is$recognised$within$the$‘fees$and$commissions$receivable’$
caption$within$the$Group$accounts.$$All$nonJtrading$income$is$recognised$within$the$‘other$operating$income’$caption.
Derivatives$are$only$utilised$in$nonJtrading$activities$and$profits$or$losses$arising$on$such$investments$are$recognised$on$an$accruals$basis$in$interest$receivable$and$
similar$income$for$asset$hedges,$and$in$interest$payable$and$similar$charges$for$liability$hedges.$$Interest$rate$swap$contracts$are$not$recognised$on$balance$sheet$but$
the$fair$value$of$all$swap$contracts$is$disclosed$in$Note$25.$$Market$values$are$used$to$determine$fair$values,$these$being$calculated$from$the$net$present$value$of$
future$cash$flows.
Loans$to$and$from$credit$institutionsLoans$to$and$from$credit$institutions$are$stated$in$the$balance$sheet$at$the$lower$of$cost$and$net$realisable$value.
Interest$receivable
Interest$payable
The$Society's$main$business$is$to$advance$mortgage$loans$that$are$fully$secured$on$residential$property$and$on$land.$$Interest$is$charged$on$individual$loans$using$
either$an$'annual$rest'$or$'daily$balance'$methodology.$$Early$release$charges$are$recognised$as$interest$receivable$on$receipt.$$The$Society$also$receives$interest$from$
its$liquid$asset$portfolio.$Interest$from$this$source$is$recognised$on$an$accruals$basis.
27
2014 2013 2014 2013£000 £000 £000 £000
2& Interest&receivable&and&similar&incomeOn(loans(fully(secured(on(residential(property 9,112& 8,927( 9,112& 8,927(On(loans(fully(secured(on(land 1,063& 1,098( 1,063& 1,098(On(debt(securities:((((((((((Interest(and(similar(income 13& 10((((((((((((( 13& 10(((((((((((((
NOTES&TO&THE&ACCOUNTS&C&continuedFOR&THE&YEAR&ENDED&31&DECEMBER&2014
Group Society
On(other(liquid(assets:((((((((((Interest(and(similar(income 334& 464( 334& 464(Net(expenses(on(financial(instruments (147) (151) (147) (151)
10,375& 10,348( 10,375& 10,348(
3& Interest&payable&and&similar&chargesOn(shares(held(by(individuals 2,424& 2,997( 2,424& 2,997(On(deposits(and(other(borrowings 705& 995( 705& 995(
3,129& 3,992( 3,129& 3,992(
4& Other&operating&income&Other&operating&income&includes:Valuation(fees 105& 81( 105& 81(Rental(income 50& 32( 50& 52(
5& Administrative&expensesStaff&costs:Wages(and(salaries 1,718& 1,573( 1,540& 1,408(Social(security(costs 197& 176( 180& 160(Other(pension(costs 68& 75( 63& 68(
1,983& 1,824( 1,783& 1,636(
Other(administrative(expenses: 1,471& 1,419( 1,327& 1,273(
Total&administrative&expenses 3,454& 3,243( 3,110& 2,909(
((Other(administrative(expenses(include(the(following: 2014 2013Remuneration(paid(to(the(auditor: £000 £000(((For(audit(of(the(Society's(annual(accounts 39& 36(
(((For(audit(of(the(Society's(subsidiary(company 3& 7((((Other(work 19& 36(((For(tax(advisory(work 5& 5(
66& 84(
Operating(lease(charges(relating(to(land(and(buildings 112& 117( 82& 87(Operating(lease(charges(relating(to(office(equipment 4& R( 4& R(
Profit/(loss)(on(disposal(of(fixed(assets 1& (4) 1& R(
28
6" Employees
The$average$number$of$staff$employed$during$the$year$was:2014 2013 2014 2013
Full1time Full=time Part1time Part=timeHead$Office 33" 30$ 5" 4$Branches 6" 6$ 6" 4$Total$Society 39" 36$ 11" 8$Subsidiary$undertakings 8" 8$ 1" 1"Total$Group 47" 44$ 11" 8$
7" Directors'"emoluments"and"transactions"with"Directors2014 2013
£ £a)#Remuneration#of#Directors
For$services$as$Non=executive$Directors 145,248" 140,652$For$Executive$services 298,566" 267,290$
443,814" 407,942$
Full$details$are$given$in$the$Report$of$the$Directors$on$Remuneration$on$pages$15$and$16.
b)#Transactions#with#Directors#and#connected#persons
Mortgage#Loans
Related#Party#Transactions
NOTES"TO"THE"ACCOUNTS"1"continuedFOR"THE"YEAR"ENDED"31"DECEMBER"2014
At$31$December$2014$there$was$an$outstanding$mortgage$loan$granted$in$the$ordinary$course$of$business$to$one$Director$(2013:$one$Director).$$The$balance$outstanding$on$the$mortgage$was$£372,586$(2013:$£380,087).
The$register,$required$to$be$maintained$under$Section$68$of$the$Building$Societies$Act$1986$detailing$all$loans,$transactions$and$arrangements$with$Directors$and$their$connected$persons,$is$held$at$the$Society's$Head$Office.$It$is$available$for$inspection,$by$members,$in$normal$office$hours$by$arrangement$with$the$Society's$Secretary,$during$the$period$of$15$days$prior$to$the$Annual$General$Meeting$and$at$the$Annual$General$Meeting.
Other$than$the$single$mortgage$advance$stated$above,$there$were$no$transactions$with$Directors$that$constituted$related$party$transactions.
29
8" Taxationa) Analysis"of"charge"in"the"year 2014 2013 2014 2013
£000 £000 £000 £000Current'Tax:Corporation.tax.at.21.49%.(2013:.23.25%) 834" 701. 805" 683.Deferred'Tax:
NOTES"TO"THE"ACCOUNTS"C"continuedFOR"THE"YEAR"ENDED"31"DECEMBER"2014
Group Society
Origination.and.reversal.of.timing.differences (6) (66) (8) (66)Tax.on.profit.on.ordinary.activities 828" 635. 797" 617.
The.standard.rate.of.corporation.tax.reduced.from.23%.to.21%.as.from.6.April.2014.
b) Factors"affecting"tax"charge"for"the"yearProfit.on.ordinary.activities.before.tax 3,782" 2,753. 3,667" 2,629.Profit.on.ordinary.activities.multiplied.byeffective.rate.of.corporation.tax.of.21.49%.(2013:.23.25%) 813" 640. 788" 611.
Effects'of:Expenses.not.deductible.for.tax.purposes 22" 14. 14" 14.Income.not.taxable (5) (15) (5) (15)Other.rates./credits (2) (11) P. P.Difference.between.capital.allowances.and..depreciation 3" 18. 5" 18.Adjustment.to.tax.charge.in.respect.of.previous.year P. 2. P. 2.ShortPterm.timing.differences 3" 53. 3" 53.Current.tax.charge.for.the.year 834" 701. 805" 683.
c) Factors"that"may"affect"future"tax"charges
9" Provisions"for"bad"and"doubtful"debtsLoans"fully"secured"on"residential"property"
Loans"fully"secured"on"
land
Total"
£000 £000 £000At.1.January.2014General.provision 177. 101. 278.Specific.provision 941. 549. 1,490.
1,118. . 650. . 1,768.
Provisions.for.loan.impairments.charged.to.income.and.expenditure.account:General.provision 3. 27. 30.Specific.provision 197. 3. 200.
200. . 30. . 230.Provisions.utilised.against.crystallised.losses:.General.provision P. (34) (34)Specific.provision P. (356) (356)
P. (390) (390)
Group"&"Society
No provision has been made for deferred taxation on gains recognised on revaluing property to its market value. Such tax would become payable only if theproperty were sold without it being possible to claim rollover relief. The total amount payable is £19,000 (2013: £21,000). At present, it is not envisaged that anytax will become payable in the foreseeable future. The standard rate of corporation tax will reduce from 21% to 20% with effect from 1 April 2015. No materialimpact.will.arise.from.the.planned.future.reductions.in.the.standard.rate.of.corporation.tax.
At.31.December.2014General.provision 180. . 94. . 274.Specific.provision 1,138. 196. 1,334.
1,318. . 290. . 1,608.
10" Loans"and"advances"to"credit"institutions
2014 2013 2014 2013£000 £000 £000 £000
Accrued.interest 31" 18. 31" 18.Repayable.on.demand 36,937" 39,650. 36,671" 39,442.Repayable.within.three.months 3,500" 500. 3,500" 500.Repayable.in.more.than.three.months.and.less.than.one.year 1,000" 1,500. 1,000" 1,500.
41,468" 41,668. 41,202" 41,460.
In.2014,.the.Society.recovered.£8,000.(2013:.£nil).from.loans.previously.written.off...This.has.been.combined.with.the.above.movement.in.the.total.provisions.figure,.excluding.utilised.provisions,.for.bad.and.doubtful.debts.of.£230,000.(2013:.£630,000).to.give.a.net.charge.to.the.income.and.expenditure.account.of.£222,000.(2013:.£630,000).
Group Society
30
11" Debt"securities"issued"by"other"borrowers
2014 2013 2014 2013
£000 £000 £000 £000
Society
NOTES"TO"THE"ACCOUNTS">"continued
FOR"THE"YEAR"ENDED"31"DECEMBER"2014
Group
Analysis-of-other-debt-securities:
Issued-by-public-bodies 2,010" 2,004-------------- 2,010" 2,004--------------
2,010" 2,004-------------- 2,010" 2,004--------------
Debt-securities-have-remaining-maturities-as-follows:
Accrued-interest 3" 2--------------------- 3" 2---------------------
Repayable-in-more-than-one-year-and-less-than-five-years 2,007" 2,002-------------- 2,007" 2,002--------------
2,010" 2,004-------------- 2,010" 2,004--------------
12" Loans"and"advances"to"customers
The-remaining-contractual-maturity-of-loans-and-advances-secured-on-residential-property-and- 2014 2013
other-advances-fully-secured-on-land,-from-the-date-of-the-balance-sheet,-is-as-follows: £000 £000
On-call-and-at-short-notice 298" 132-
In-not-more-than-three-months 1,576" 636-
In-more-than-three-months-but-not-more-than-one-year 3,126" 2,610-
In-more-than-one-year-but-not-more-than-five-years 26,836" 25,463-
In-more-than-five-years 188,642" 183,142-
Group"&"Society
220,478" 211,983-
Less:-Provisions-for-bad-and-doubtful-debts-(see-note-9) (1,608) (1,768)
Less:-Provisions-for-suspended-interest-on-impaired-loans-(see-below) (18) (17)
218,852" 210,198-
The-above-table-may-not-reflect-actual-experience-of-repayments-since-many-mortgage-loans-are-repaid-early.
13" Investment"in"subsidiary"undertakings
a) Investment"in"Bath"Property"Letting"Limited
Movements-during-the-year-were-as-follows: Shares Loans Total
£ £ £
At-1-January-2014 250,000- 1,744- 251,744-
Net-loans T (130) (130)
Net-book-value-at-31-December-2014 250,000- 1,614- 251,614-
-Net-book-value-at-31-December-2013 250,000- 1,744- 251,744-
Bath-Property-Letting-Limited-is-a-100%-subsidiary-of-the-Society-and-is-registered-in-England-and-Wales.-The-principal-business-activity-of-the-subsidiary-is-that-of-property-
management-operating-wholly-in-the-United-Kingdom.
The-Society-participates-in-the-Bank-of-England's-Funding-for-Lending-Scheme.--The-scheme-requires-the-Society-to-place-a-proportion-of-its-total-portfolio-of-mortgage-loans-with-
the-bank-to-be-held-as-collateral-against-funds-drawn-from-the-scheme.--The-portfolio-of-loans-that-is-prepositioned-with-the-bank-is-fully-encumbered.
The-Society-continues-to-invest-in-developing-and-enhancing-its-arrears-management-strategies-to-minimise-credit-risk-losses-whilst-ensuring-customers-are-treated-fairly.-These-
forbearance-arrangements-(see-note-1)-are-undertaken-in-line-with-the-Society’s-credit-policy,-and-include-the-conversion-of-loan-payments-to-an-interestTonly-basis,-capitalisation-
of-property-management-charges,-conversion-of-loans-onto-fixed-rate-interest-and-other-special-arrangements-agreed-on-a-caseTbyTcase-basis.--As-at-31-December-2014-the-Society-
had-one-case-where-interest-of-£18,000-(2013:-£17,000),-relating-to-arrears-balances,-had-been-suspended.
Society
b) Investment"in"Bath"&"City"Financial"Limited
The-Society-disposed-of-its-51%-shareholding-in-Bath-&-City-Financial-Limited-for-£25,500-on-30-November-2014.--All-existing-interTcompany-loans-and-balances-were-settled-before-
the-date-of-sale.--The-Society's-equity-investment-in-Bath-&-City-Financial-Limited-had-previously-been-fully-written-down-to-£nil.--The-sale-resulted-in-a-gain-on-disposal-of-£25,500-
being-booked-to-the-Society's-income-and-expenditure-account.--On-consolidation-into-the-Group-accounts,-a-shortfall-of-£10,000-occured-between-the-sale-proceeds-received-and-
the-net-assets-of-Bath-&-City-Financial-Limited-as-at-the-date-of-disposal-and-thus-a-loss-on-disposal-of-£10,000-has-been-booked-to-the-Group-income-and-expenditure-account.
31
14# Fixed#assets
Tangible#fixed#assetsa) Group Leasehold Office-and Furniture,
Freehold premises computer fittings
premises (short) equipment and-cars Total
£000 £000 £000 £000 £000
At#cost#or#valuation
At-1-January-2014 2,559- 65- 2,596- 683- 5,903-
NOTES#TO#THE#ACCOUNTS#@#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014
Additions H- H- 88- 32- 120-
Disposals H- H- (22) (24) (46)
At-31-December-2014 2,559- 65- 2,662- 691- 5,977-
Accumulated#depreciationAt-1-January-2014 H- 34- 2,368- 549- 2,951-
Charge 34- 17- 119- 59- 229-
Disposals H- H- (20) (17) (37)
At-31-December-2014 34- 51- 2,467- 591- 3,143-
Net#book#value#
At#31#December#2014 2,525# 14# 195# 100# 2,834#At-31-December-2013 2,559- 31- 228- 134- 2,952-
b) SocietyAt#cost#or#valuation
At-1-January-2014 2,559- 65- 2,512- 636- 5,772-
Additions H- H- 71- 32- 103-
Disposals H- H- (10) (24) (34)
At-31-December-2014 2,559- 65- 2,573- 644- 5,841-
Accumulated#depreciation
At-1-January-2014 H- 34- 2,292- 516- 2,842-
Charge 34- 16- 114- 54- 218-
Disposals H- H- (8) (17) (25)
At-31-December-2014 34- 50- 2,398- 553- 3,035-
Net#book#value#
At#31#December#2014 2,525# 15# ## 175# 91# 2,806#At-31-December-2013 2,559- 31- -- 220- 120- 2,930-
c)
d)
e)
The depreciated historical cost of revalued freehold and leasehold premises at 31 December 2014 was £2,145,502 (2013: £2,197,196); the premises are stated above at their
revalued-amounts-totalling-£2,538,667-(2013:-£2,589,327).
During-the-year-the-Society-and-Group-occupied-for-its-own-use-freehold-and-leasehold-property-with-a-net-book-value-of-£1,955,998-(2013:-£1,964,488).--
An-external-revaluation-of-all-the-Group's-freehold-and-leasehold-land-and-buildings-was-last-conducted-as-at-31-December-2013-by-Brooks-Chartered-Surveyors.--The-
valuation-of-properties-used-in-Group-businesses-was-prepared-on-'existing-use-value'-as-defined-in-Practice-Statement-4.3-of-the-RICS-Manual-of-Valuation.--Properties-not-
used-in-Group-businesses-were-valued-using-a-market-value-basis.--The-different-bases-used-in-the-revaluation-process-made-no-material-difference-to-the-valuations-
obtained.
Intangible#fixed#assets
Group Purchased-
goodwill
£000
At#cost#or#valuationAt-1-January-2014-and-31-December-2014 413-
AmortisationAt-1-January-2014-and-31-December-2014 99-
Charge 20-
At-31-December-2014 119-
ImpairmentAt-1-January-2014- (25)
Charge (3)
At-31-December-2014 (28)
Net#book#value#At#31#December#2014 266#At-31-December-2013 289-
32
15# Deferred#taxation
2014 2013 2014 2013
£000 £000 £000 £000
Deferred+tax+asset/(liability)+at+1+January 44# (22) 42# (24)
Movement+during+the+year 5# 66+ 8# 66+
Deferred+tax+asset+at+31+December 49# 44+ 50# 42+
The$elements$of$deferred$taxation$are$as$follows:Capital+allowances+in+excess+of+depreciation+ (11) (13) (10) (15)
ShortHterm+timing+differences 60# 57+ 60# 57+
Deferred+tax+asset 49# 44+ 50# 42+
16# Shares
2014 2013
Repayable+on+demand: £000 £000
Accrued+interest 444# 595+
Held+by+individuals 187,842# 187,628+
188,286# 188,223+
17# Amounts#owed#to#other#customers
Amounts+owed+to+other+customers+are+repayable+ 2014 2013 2014 2013
++from+the+balance+sheet+date+in+the+ordinary+course £000 £000 £000 £000
++of+business+as+follows:
Accrued+interest 13# 20+ 13# 20+
Repayable+on+demand 42,841# 36,157+ 42,943# 36,157+
In+not+more+than+three+months 139# 451+ 139# 551+
In+more+than+three+months+but+not+more+than+one+year 22,899# 25,521+ 22,899# 25,521+
In+more+than+one+year C# + C# +
65,892# 62,149+ 65,994# 62,249+
18# Other#liabilities
2014 2013 2014 2013
£000 £000 £000 £000
Amounts$falling$due$within$one$year:Income+tax 156# 160+ 156# 160+
Corporation+tax 428# 350+ 406# 331+
Other+taxation+and+social+security 70# 64+ 54# 48+
Other+creditors 265# 297+ 147# 164+
919# 871+ 763# 703+
19# Provisions#for#liabilities
Group#&#Society
Provision+for Provision+for+ Provision Total
dilapidations Financial for+customer
Services redress
Compensation
Scheme+levy
£000 £000 £000 £000
At+1+January+2014 12+ 87+ 1+ 100+
Charge+for+the+year H+ 166+ 19 185+
Paid+in+the+year H+ (168) H+ (168)
At+31+December+2014 12+ 85+ 20+ 117+
Society
Society
The+provision+for+dilapidations+will+likely+be+utilised+in+2015+if+Bath+Property+Letting+Limited+exits+its+leased+business+premises+at+Southgate,+
Bath.++The+provision+for+the+Financial+Services+Compensation+Scheme+Levy+will+be+utilised+in+2015.++See+the+Strategic+Report+on+page+6+for+details+
The+provision+for+the+Financial+Services+Compensation+Scheme+levy+was+disclosed+within+accruals+and+deferred+income+in+the+prior+year+but+has+
been+reclassified+as+a+provision+for+liabilities+to+better+reflect+how+management+report+the+provision+internally.
Group
NOTES#TO#THE#ACCOUNTS#C#continued
FOR#THE#YEAR#ENDED#31#DECEMBER#2014
Group#&#Society
Group Society
Group
33
20# Reserves
Group Society Group Society2014 2014 2013 2013 2014 2013
£000 £000 £000 £000 £000 £000 &
Balance&at&1&January&as&previously&stated 20,583# 20,391# 18,471& 18,370& 431# 371&
NOTES#TO#THE#ACCOUNTS#B#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014
RevaluationGeneral
Group#&#Society
Profit&for&the&year 2,942# 2,870# 2,103& 2,012& B# B#Revaluation&of&fixed&assets&in&the&year B# B# B# B# B# 69&Transfer&in&respect&of&revalued&fixed&assets 3# 3# 9& 9& (3) (9)
Balance&at&31&December 23,528# 23,264# 20,583& 20,391& 428# 431&
21# Minority#interests2014 2013
£000 £000
Balance&at&1&January& 22# 7&
Group
Profit&on&ordinary&activities&after&taxation 12# 15&
Movement&in&investment&in&subsidiary (34) B#Balance&at&31&December& B# 22&
22# Commitments#SocietyGroup
2014 2013 2014 2013
£000 £000 £000 £000
Operating*leasesThe&Group&and&the&Society&have&the&following&annual&commitments&under
operating&leases&relating&to&land&and&buildings&that&expire&as&follows:
Less&than&one&year 112# 5&&&&&&&&&&&&&&&& 82# 5&&&&&&&&&&&&&&&&
Between&one&and&two&years B# 112&&&&&&&&&&&& B# 82&&&&&&&&&&&&&&
The&Group&and&the&Society&have&the&following&annual&commitments&underoperating&leases&relating&to&office&equipment&that&expire&as&follows:
Between&one&and&two&years 4# R&&&&&&&&&&&&&&&&& 4# R&&&&&&&&&&&&&&&&&
23# Pension#schemes
24# Contingent#liabilities
a) Financial#Services#Compensation#Scheme
During&the&year&ended&31&December&2014&the&Group&operated&a&defined&contribution&Group&personal&pension&scheme&in&respect&of&staff,&and&the&charge&for&the&year&was&£68,284&
(2013:&£74,625).&&As&at&31&December&2014&there&were&outstanding&contributions&of&£5,255&(2013:&£6,470).
Payments&in&respect&of&levies&to&the&Financial&Services&Compensation&Scheme&are&made&in&each&fiscal&year,&based&on&the&Society's&share&of&protected&Scheme&deposits&at&the&start&of&
each&calendar&year.&&The&Society's&liability&to&the&Scheme&consists&of&three&elements,&namely&a&management&levy,&a&capital&shortfalls&levy&and&a&levy&contribution&to&the&resolution&
costs&in&respect&of&the&bailout&of&the&Dunfermline&Building&Society.&The&management&levy&is&calculated&based&on&an&applicable&interest&rate&of&12Rmonth&LIBOR&plus&one&hundred&
basis&points.&As&at&31&December&2014,&the&Society&had&paid&over&£626,779&to&the&Scheme&relating&to&the&period&covered&by&fiscal&years&2007/08&through&to&2014/15.&&The&FSCS&has&
indicated&that&the&capital&shortfalls&levy&is&likely&to&continue&over&scheme&year&2015/16.&A&further&provision&of&£166,000&has&been&made&in&the¤t&year&to&ensure&that&the&
Society&is&fully&provided&against&all&estimates&of¤t&levy&liabilities.&&The&Society&has&provided&against&liabilities&to&the&Scheme&using&best&estimates&of&the&level&of&its¤t&
expected&exposure.&&There&exists&a&level&of&uncertainty&as&to&the&Society's&&precise&exposure&to&the&scheme&for&fiscal&year&2014/15&but&the&Society&estimates&that&it&remains&liable&for&
further&commitments&covering&fiscal&year&2014/15&totalling&£84,775.&&Furthermore,&there&is&uncertainty&over&the&future&duration&of&the¤t&Scheme&and&as&to&the&level&of&future&
interest&rates&that&would&apply.&&There&is&also&uncertainty&as&to&whether&the&Society&will&have&any&further&liability&to&the&Scheme&if&projected&capital&shortfalls&should&increase&and&
what&the&scale&of&those&liabilities&would&likely&be.&The&final&capital&shortfall&from&the&bailout&of&the&Bradford&&&Bingley&is¬&known&and&neither&is&the&full&impact&from&the&bailout&of&
the&Dunfermline&Building&Society.
b) Other#liabilities
Section&22&of&the&Building&Societies&Act&1986&was&repealed&with&effect&from&11&June&1996&and&the&Society&therefore&has&no&obligation&to&stand&by&its&subsidiaries&in&respect&of&
liabilities&incurred&after&this&date.&&However,&it&is&the&intention&of&the&Board&to&continue&to&support&its&subsidiary&undertakings&if&support&is&required.
34
25# Financial#instruments
Outstanding#derivative#contracts
The$Society's$management$committee$structure$is$designed$such$that$each$committee$concentrates$on$monitoring$one$of$the$Society's$key$risk$areas$such$as$credit$risk,$financial$risk,$conduct$and$operational$risk.$$Each$committee$has$established$risk$limits,$reporting$lines,$mandates$and$other$control$procedures$and$these$are$reviewed$by$the$Board's$Risk$Committee$on$a$regular$basis.
NOTES#TO#THE#ACCOUNTS#=#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014
A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability of another entity. The Group is a retailer of financialinstruments, mainly in the form of mortgages and savings products. The Group uses wholesale financial instruments to invest liquid asset balances, raise wholesalefunds$and$to$manage$the$financial$risks$arising$from$its$operations.
The$derivative$instruments$used$by$the$Society$in$managing$its$balance$sheet$exposures$are$interest$rate$swaps.$$These$are$used$to$protect$the$Society$from$exposures$arising$principally$from$fixed$rate$mortgage$lending.$$The$durations$of$the$off$balance$sheet$contracts$are$generally$short$to$medium$term$and$their$maturity$profile$reflects$the$nature$of$the$exposures$arising$from$the$underlying$business$activities.
Instruments$used$for$risk$management$purposes$include$derivative$financial$instruments$('derivatives'),$which$are$contracts$or$agreements$whose$value$is$derived$from$one$or$more$of$underlying$price,$rate$or$index$inherent$in$the$contracts$or$agreement,$such$as$interest$rates$or$stock$market$indices.$$All$transactions$in$derivatives$are$undertaken$to$manage$the$risks$arising$from$underlying$business$activities.
These$derivatives$are$only$used$by$the$Society$in$accordance$with$the$Building$Societies$Act$1986$to$limit$the$extent$to$which$the$Society$will$be$affected$$by$changes$in$interest$rates$or$other$factors$specified$in$the$legislation.$Derivatives$are$not$used$in$trading$activity$for$speculative$purposes,$and$consequently$all$such$instruments$are$classified$as$hedging$contracts.
The$table$below$shows$the$notional$principal$amounts,$credit$weighted$amounts$and$replacement$costs$of$derivatives.$$Notional$principal$amounts$indicate$the$volume$of$business$outstanding$at$the$balance$sheet$date$and$do$not$represent$amounts$of$risk.$$The$credit$risk$weighted$amount$is$calculated$according$to$the$rules$specified$by$the$Financial$Services$Authority$that$takes$into$account$the$residual$maturity$of$derivative$contracts$and$the$nature$of$each$counterparty.$$The$replacement$cost$represents$the$cost$of$replacing$contracts$with$a$positive$value,$calculated$at$market$rates$current$at$the$balance$sheet$date,$and$reflects$the$Society's$maximum$exposure$should$all$counterparties$default.
The$Society's$management$committee$structure$is$designed$such$that$each$committee$concentrates$on$monitoring$one$of$the$Society's$key$risk$areas$such$as$credit$risk,$financial$risk,$conduct$and$operational$risk.$$Each$committee$has$established$risk$limits,$reporting$lines,$mandates$and$other$control$procedures$and$these$are$reviewed$by$the$Board's$Risk$Committee$on$a$regular$basis.
NOTES#TO#THE#ACCOUNTS#=#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014
A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability of another entity. The Group is a retailer of financialinstruments, mainly in the form of mortgages and savings products. The Group uses wholesale financial instruments to invest liquid asset balances, raise wholesalefunds$and$to$manage$the$financial$risks$arising$from$its$operations.
The$derivative$instruments$used$by$the$Society$in$managing$its$balance$sheet$exposures$are$interest$rate$swaps.$$These$are$used$to$protect$the$Society$from$exposures$arising$principally$from$fixed$rate$mortgage$lending.$$The$durations$of$the$off$balance$sheet$contracts$are$generally$short$to$medium$term$and$their$maturity$profile$reflects$the$nature$of$the$exposures$arising$from$the$underlying$business$activities.
Instruments$used$for$risk$management$purposes$include$derivative$financial$instruments$('derivatives'),$which$are$contracts$or$agreements$whose$value$is$derived$from$one$or$more$of$underlying$price,$rate$or$index$inherent$in$the$contracts$or$agreement,$such$as$interest$rates$or$stock$market$indices.$$All$transactions$in$derivatives$are$undertaken$to$manage$the$risks$arising$from$underlying$business$activities.
These$derivatives$are$only$used$by$the$Society$in$accordance$with$the$Building$Societies$Act$1986$to$limit$the$extent$to$which$the$Society$will$be$affected$$by$changes$in$interest$rates$or$other$factors$specified$in$the$legislation.$Derivatives$are$not$used$in$trading$activity$for$speculative$purposes,$and$consequently$all$such$instruments$are$classified$as$hedging$contracts.
The$table$below$shows$the$notional$principal$amounts,$credit$weighted$amounts$and$replacement$costs$of$derivatives.$$Notional$principal$amounts$indicate$the$volume$of$business$outstanding$at$the$balance$sheet$date$and$do$not$represent$amounts$of$risk.$$The$credit$risk$weighted$amount$is$calculated$according$to$the$rules$specified$by$the$Financial$Services$Authority$that$takes$into$account$the$residual$maturity$of$derivative$contracts$and$the$nature$of$each$counterparty.$$The$replacement$cost$represents$the$cost$of$replacing$contracts$with$a$positive$value,$calculated$at$market$rates$current$at$the$balance$sheet$date,$and$reflects$the$Society's$maximum$exposure$should$all$counterparties$default.
2014£000
Notional$principal$amount 11,900#Credit$risk$weighted$amount 13#Replacement$cost =#
2013£000
$$$$$$$$$$$$$$11,650$23$$$$$$$$$$$$$$$$$$$$10$$$$$$$$$$$$$$$$$$$$
35
25# Financial#instruments#(continued)
Fair#values#of#financial#instruments
On#balance#sheet#instrumentsDebt%securities
Off#balance#sheet#instrumentsInterest%rate%swaps
Hedges
Gains%and%losses%arising%in%the%year%ended%31%December%2014that%were%not%recognised%in%the%same%yearGains%and%losses%to%be%realised%in%the%year%to%31%December%2015Gains%and%losses%to%be%realised%after%31%December%2015
Risk#management
Credit#risk
Hedges%which%comprise%the%'derivatives'%referred%to%above%are%used%to%reduce%the%risk%of%loss%arising%from%changes%in%interest%rates.%%Gains%and%losses%on%instruments%used%for%hedging%are%recognised%in%line%with%the%item%being%hedged%and%are%only%recognised%in%the%event%of%the%underlying%exposure%itself%being%unwound.%%The%following%table%sets%out%the%movements%in%unrecognised%gains%and%losses%in%the%year%to%31%December%2014.
NOTES#TO#THE#ACCOUNTS#B#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014
The main risks arising from the Group's activities are credit risk, liquidity risk and interest rate risk. The Board reviews and agrees policies for managing each of these risks, assummarised%below.
Set out below is a comparison of book and fair values of some of the Group's financial assets and financial liabilities as at 31 December 2014 and 2013. Market values havebeen used to determine fair values. The table excludes certain financial assets and financial liabilities which are not listed or publicly traded, or for which a liquid and activemarket%does%not%exist.%%It%therefore%excludes%items%such%as%mortgages,%share%accounts%and%bank%deposits.
The%Group's%credit%risk%arises%from%its%loan%portfolio%and%from%potential%losses%that%could%result%from%the%failure%of%counterparties%to%observe%the%terms%of%the%contract%entered%into.%All%loan%applications%are%assessed%with%reference%to%lending%policy.%Changes%to%the%policy%are%approved%by%the%Board.%The%Assets%and%Liabilities%Committee%is%responsible%for%approving%treasury%counterparties.%%The%Society%holds%security%against%all%loans%made%to%customers%by%way%of%first%charge%mortgages%made%against%residential%property%and%land.
2014 2014 2013 2013Book#value Fair#value Book%value Fair%value
£000 £000 £000 £000
2,007# 2,013# 2,002% 2,002%
B# (60) P% (121)
2014 2014 2014Unrecognised#
gainsUnrecognised#
lossesNet#gain#/#(loss)
£000 £000 £000
B# (60) (60)B# (7) (7)B# (53) (53)
Hedges%which%comprise%the%'derivatives'%referred%to%above%are%used%to%reduce%the%risk%of%loss%arising%from%changes%in%interest%rates.%%Gains%and%losses%on%instruments%used%for%hedging%are%recognised%in%line%with%the%item%being%hedged%and%are%only%recognised%in%the%event%of%the%underlying%exposure%itself%being%unwound.%%The%following%table%sets%out%the%movements%in%unrecognised%gains%and%losses%in%the%year%to%31%December%2014.
NOTES#TO#THE#ACCOUNTS#B#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014
The main risks arising from the Group's activities are credit risk, liquidity risk and interest rate risk. The Board reviews and agrees policies for managing each of these risks, assummarised%below.
Set out below is a comparison of book and fair values of some of the Group's financial assets and financial liabilities as at 31 December 2014 and 2013. Market values havebeen used to determine fair values. The table excludes certain financial assets and financial liabilities which are not listed or publicly traded, or for which a liquid and activemarket%does%not%exist.%%It%therefore%excludes%items%such%as%mortgages,%share%accounts%and%bank%deposits.
The%Group's%credit%risk%arises%from%its%loan%portfolio%and%from%potential%losses%that%could%result%from%the%failure%of%counterparties%to%observe%the%terms%of%the%contract%entered%into.%All%loan%applications%are%assessed%with%reference%to%lending%policy.%Changes%to%the%policy%are%approved%by%the%Board.%The%Assets%and%Liabilities%Committee%is%responsible%for%approving%treasury%counterparties.%%The%Society%holds%security%against%all%loans%made%to%customers%by%way%of%first%charge%mortgages%made%against%residential%property%and%land.
Liquidity#riskThe Group's liquidity policy is to maintain sufficient liquid resources to cover cash flow imbalances and fluctuations in funding to retain full public confidence in the solvency ofthe Group and to enable the Group to meet its financial obligations. This is achieved through maintaining a prudent level of liquid assets and through management control ofasset%growth%in%the%business.%The%Group%has%£nil%(2013:%£nil)%of%its%liquid%assets%encumbered%as%part%of%credit%support%agreements%attached%to%interest%rate%swap%contracts.
The Group's liquidity policy is to maintain sufficient liquid resources to cover cash flow imbalances and fluctuations in funding to retain full public confidence in the solvency ofthe Group and to enable the Group to meet its financial obligations. This is achieved through maintaining a prudent level of liquid assets and through management control ofasset%growth%in%the%business.%The%Group%has%£nil%(2013:%£nil)%of%its%liquid%assets%encumbered%as%part%of%credit%support%agreements%attached%to%interest%rate%swap%contracts.
36
25# Financial#instruments#(continued)
Interest#rate#risk
Not$morethan$three Non+interest
months bearing Total31#December#2014 £000 £000 £000 £000 £000 £000AssetsLiquid$assets 56,055$$$$$$$$$$$$$ =# 1,000$$$$$$$$$$$$$$$ =# 42 57,097$$$$$$$$$$$$$Loans$and$advances$to$customers 210,837$$$$$$$$$$$ 388$ 2,329$ 6,906$ (1,608) 218,852$Tangible$fixed$assets =# =# =# =# 2,834$ 2,834$Other$assets =# =# =# =# 579$ 579$Total$assets 266,892$ 388$ 3,329$ 6,906$$$$$$$$$$$$$$$ 1,847$ 279,362$
LiabilitiesShares 160,093$ 12,769$ 14,980$ =# 444$ 188,286$Amounts$owed$to$customers 63,967$ 920$ 992$ =# 13$ 65,892$Accruals$and$deferred$income =# =# =# =# 192$ 192$Other$liabilities =# =# =# =# 1,036$ 1,036$Reserves =# =# =# =# 23,956$ 23,956$Minority$interest =# =# =# =# =# =#Total$liabilities 224,060$ 13,689$ 15,972$ =# 25,641$ 279,362$
Net$assets/(liabilities) 42,832$ (13,301) (12,643) 6,906$ (23,794) =#Off$balance$sheet$items (2,500) (850) (2,250) (6,300) 11,900$ +$$$$$$$$$$$$$$$$$$$$$$$
Interest$rate$sensitivity$gap 40,332# (14,151) (14,893) 606# (11,894) +$$$$$$$$$$$$$$$$$$$$$$$
31#December#2013AssetsLiquid$assets 57,297$ 1,500$ =# +$ 20$ 58,817$Loans$and$advances$to$customers 200,383$ 649$ 3,393$ 7,541$ (1,768) 210,198$Tangible$fixed$assets =# =# =# =# 2,952$ 2,952$Other$assets =# =# =# =# 574$ 574$Total$assets 257,680$ 2,149$ 3,393$ 7,541$ 1,778$ 272,541$
LiabilitiesShares 145,394$ 16,885$ 25,349$ =# 595$ 188,223$Amounts$owed$to$customers 60,306$ 913$ 910$ =# 20$ 62,149$Accruals$and$deferred$income =# =# =# =# 162$ 162$Other$liabilities =# =# =# =# 971$ 971$Reserves =# =# =# =# 21,014$ 21,014$Minority$interest =# =# =# =# 22$ 22$Total$liabilities 205,700$ 17,798$ 26,259$ =# 22,784$ 272,541$
Net$assets/(liabilities) 51,980$ (15,649) (22,866) 7,541$ (21,006) =#Off$balance$sheet$items =# (750) (1,850) (9,050) 11,650$ =#
Interest$rate$sensitivity$gap 51,980$ (16,399) (24,716) (1,509) (9,356) =#
More$than$one$year$but$not$
more$than$five$years
NOTES#TO#THE#ACCOUNTS#=#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014
More$than$three$months$but$not$more$
than$six$months
More$than$six$months$but$
not$more$than$one$year
As$at$the$balance$sheet$date,$the$Society$estimates$that$the$positive$impact$on$the$Society’s$profitability$from$a$parallel$shift$of$+2%$in$the$gilt$yield$curve$would$be$£258,000$(2013:$£342,000).$$The$Society$estimates$that$the$negative$impact$on$the$Society's$profitability$from$a$parallel$shift$of$+2%$in$the$gilt$yield$curve$would$be$£258,000$(2013:$£342,000).
The$Society$is$exposed$to$movements$in$interest$rates$reflecting$the$mismatch$between$the$dates$on$which$interest$receivable$on$assets$and$interest$payable$on$liabilities$are$next$reset$to$market$rates,$or,$if$earlier,$the$dates$on$which$the$instruments$mature.$$The$Society$manages$this$exposure$by$using$both$on$and$off$balance$sheet$instruments.$$After$taking$into$account$the$derivatives$entered$into$by$the$Society,$the$interest$rate$exposures$at$31$December$2014$and$31$December$2013$were:
37
1" Statutory"percentages Statutory2014 Limit% %
Lending'Limit 9.0 25.0Funding'Limit 26.1 50.0
X'=
Y'=
X'=
1'
2'
3'
Y'=
the'principal'value'of,'and'interest'accrued'on,'shares'in'the'Society;'and
the principal value of, and interest accrued under, instruments or agreements creating or acknowledging indebtednessand accepted, made, issued or entered into by the Society or any such undertaking less any amounts qualifying as ownfunds.
the principal value of, and interest accrued on, shares in the Society held by individuals otherwise than as bare trustees forbodies'corporate'or'for'persons'who'include'bodies'corporate.
the principal of, and interest accrued on, sums deposited with the Society or any subsidiary undertaking of the Society;and
The'Funding'Limit'measures'the'proportion'of'shares'and'borrowings'not'in'the'form'of'shares'held'by'individuals'and'is'calculated'as'(XKY)/X'where:
shares'and'borrowings,'being'the'aggregate'ofK
ANNUAL"BUSINESS"STATEMENTFOR"THE"YEAR"ENDED"31"DECEMBER"2014
The'above'percentages'have'been'calculated'in'accordance'with'the'provisions'of'the'Building'Societies'Act'1986.
The Lending Limit measures the proportion of business assets not in the form of loans fully secured on residential property and iscalculated'as'(XKY)/X'where:
business'assets,'being'the'total'assets'of'the'Group,'plus'provisions'for'bad'and'doubtful'debts,'less'liquid'assets'and'tangible'fixed'assets'as'shown'in'the'Group'Balance'Sheet.
the'principal'of,'and'interest'accrued'on,'loans'owed'to'the'Group,'as'shown'in'the'Group'Balance'Sheet,'gross'of'mortgage'loss'provisions,'which'are'fully'secured'on'residential'property.'
The statutory limits are as laid down under the Building Societies Act 1986, and ensure that the principal purpose of a building societyis'that'of'making'loans'which'are'secured'on'residential'property'and'are'funded'substantially'by'its'members.
38
2" Other"percentages"(Group)2014 2013
% %
9.4 8.48.4 7.322.5 23.5
1.07 0.781.34 1.29
*
*
*
*
*
*
Management4expenses4as4a4percentage4of4mean4total4assets:
'Mean total assets' represent the amount produced by halving the aggregate of total assets at the beginning and end ofthe4financial4year.
The4above4percentages4have4been4prepared4from4the4Group4accounts4and4in4particular:
'Shares4and4borrowings'4represent4the4total4of4shares4and4amounts4owed4to4other4customers.
'Gross4capital'4represents4the4aggregate4of4general4reserves4and4revaluation4reserve.
'Liquid assets' represents the total of cash in hand, loans and advances to credit institutions and debt securities issuedby4other4borrowers4as4shown4in4the4balance4sheet.
ANNUAL"BUSINESS"STATEMENT"G"continuedFOR"THE"YEAR"ENDED"31"DECEMBER"2014
As4percentage4of4shares4and4borrowings:
Gross4capitalFree4capital
'Management expenses' represent the aggregate of administrative expenses, depreciation and amortisation andexclude4the4Levy4to4the4Financial44Services4Compensation4Scheme.
Liquid4assets
Profit4for4the4year4as4a4percentage4of4mean4total4assets
'Free capital' represents the aggregate of gross capital and general loss provisions for bad and doubtful debts lesstangible4fixed4assets.
39
3.#######Directors#and#Officers
The$Directors$and$Officers$of$the$Society$at$31$December$2014$together$with$their$further$particulars$were$as$follows:
Name Occupation Appointment Other#Directorships
C#J#L#Moorsom Professional$Director Saturday,$1$October$05 Amati$VCT$2$PlcRWCMD$Ltd
C#W#J#Nott Accountant Friday,$1$December$06
D#A#Berresford Accountant Friday,$1$February$08 The$Pensions$RegulatorTriodos$Renewables$PlcHyperion$Insurance$Group$Ltd
C#M#Smyth Business$Consultant Tuesday,$1$January$13 C$M$Smyth$Ltd
R#Derry@Evans Professional$Director$and$Legal$Consultant Sunday,$1$June$14 360$Legal$Group$LtdOmnia$Legal$LtdCobalt$Health$LtdRomi$Behrens$Paintings$Ltd
D#Stirk Management$Consultant Sunday,$1$June$14
A#Cha Solicitor Sunday,$1$June$14
R#D#Jenkins Building$Society$CEO Monday,$1$December$03 Bath$Property$Letting$Ltd
K#A#Gray Building$Society$Finance$Director$and$Deputy$ Sunday,$1$September$02
Documents$may$be$served$on$the$above$named$Directors$c/o$The$Society$Secretary,$Bath$Building$Society,$15$Queen$Square,$Bath,$BA1$2HN.
Details$of$Directors’$service$contracts$are$shown$in$the$Directors’$Remuneration$Report.
Other#Officers
Name Business#Occupation DirectorshipsT$Lovell Society$Secretary Bath$Property$Letting$LimitedMark$Wiltshaw Head$of$Savings$and$InvestmentsSteve$Mathews Head$of$Mortgages
No$Director$or$other$Officer$has$any$rights$to$subscribe$for$shares$in$the$Society’s$subsidiary$undertaking.
ANNUAL#BUSINESS#STATEMENT#@#continuedFOR#THE#YEAR#ENDED#31#DECEMBER#2014
40
(01225)'330'837(01225)'445271
(01225)'314055
Registered'No.'30B
YOUR%LOCAL%SOCIETYREGISTERED%NAME%AND%OFFICE
Bath'Investment'&'Building'Society15'Queen'Square,'Bath,'BA1'2HN,'Tel'Bath'(01225)'423271
BRANCH%OFFICES
Ilminster'J'Harper'Dolman'&'West,'20'East'Street,'TA19'0AJ (01460)'53095
Bath'J'3'Wood'Street,'BA1'2JQOldfield'Park'J'12/13'Moorland'Road,'Oldfield'Park,'Bath,'BA2'3PL
AGENCY%OFFICES
BATH%PROPERTY%LETTING
Bath'J'34'Southgate,'BA1'1TP
Wellington 'J'MJC'Financial'Planning,'22'South'Street,'TA21'8NS (01823)'663174
Midsomer%Norton 'J'Waterhouse'Financial'Advisers,'23'High'Street,'BA3'2DR (01761)'412980Shaftesbury 'J'Chaffers'Estate'Agents,'48'High'Street,'SP7'8AA (01747)'852301South%Petherton 'J'Hamdon'Financial'Services,'36'St'James'Street,'TA13'5BT (01460)'240000Staple%Hill 'J'Mark'Richard'Insurance,'141'High'Street,'BS16'5HQ (01179)'575008
Head Office:15 Queen Square, Bath BA1 2HN.
Investment enquiries:Telephone:01225 423271Fax:01225 446914Email:[email protected]
Mortgage enquiries:Telephone:01225 475702Fax:01225 424590Email:[email protected]
Web:www.bathbuildingsociety.co.uk
Telephone calls may be recorded to help the Society to maintain high standards of service delivery.
Bath Investment & Building Society is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority, Registration Number 206026.