ANNUAL REPORT & ACCOUNTS · As reported in last year’s Annual Report, Matt Dobson joined the...

2017ACCOUNTS

ANNUALREPORT &

FBS_2017 AGM Annual Report Accounts A4 Brochure.indd 1 13/03/2018 14:58

2 Annual Report & Accounts 2017


Contents

Performance Summary 4

Chairman’s Report 5

Directors’ Report 8

Statement of Directors’ Responsibilities 14

The Board of Directors and Secretary 15

Corporate Governance Report 17

Directors’ Remuneration Report 28

Independent Auditors’ Report 31

Statement of Comprehensive Income 35

Statement of Changes in Equity 36

Statement of Financial Position 37

Group Cash Flow Statement 38

Notes to the Accounts 39

Annual Business Statement 69

Annual Report & Accounts 2017 3

2017ANNUAL REPORT & ACCOUNTS


Financial Strength

Business PerformanceRetail Share and Deposit Balances Mortgage Balances

Profit After Tax Gross Capital as a % of Shares and Borrowings

2013 2014 2015 2016 2017

2017 8.76%

£2.0

3m

£3.0

4m

£2.7

5m

£1.1

0m

£3.2

2m

2013 2014 2015 2016 2017

£806.88m

2013 2014 2015 2016 2017

£647

.08m

£686

.48m

£687

.76m

£696

.29m

£763

.68m

£818.94m

£738.70m£776.16m

£804.40m

2016 9.18%2015 8.44%2014 8.10%2013 8.14%

2013 2014 2015 2016 2017

2017 8.76%

£2.0

3m

£3.0

4m

£2.7

5m

£1.1

0m

£3.2

2m

2013 2014 2015 2016 2017

£806.88m

2013 2014 2015 2016 2017

£647

.08m

£686

.48m

£687

.76m

£696

.29m

£763

.68m

£818.94m

£738.70m£776.16m

£804.40m

2016 9.18%2015 8.44%2014 8.10%2013 8.14%

2013 2014 2015 2016 2017

2017 8.76%

£2.0

3m

£3.0

4m

£2.7

5m

£1.1

0m

£3.2

2m

2013 2014 2015 2016 2017

£806.88m

2013 2014 2015 2016 2017

£647

.08m

£686

.48m

£687

.76m

£696

.29m

£763

.68m

£818.94m

£738.70m£776.16m

£804.40m

2016 9.18%2015 8.44%2014 8.10%2013 8.14%

2013 2014 2015 2016 2017

2017 8.76%

£2.0

3m

£3.0

4m

£2.7

5m

£1.1

0m

£3.2

2m

2013 2014 2015 2016 2017

£806.88m

2013 2014 2015 2016 2017

£647

.08m

£686

.48m

£687

.76m

£696

.29m

£763

.68m

£818.94m

£738.70m£776.16m

£804.40m

2016 9.18%2015 8.44%2014 8.10%2013 8.14%

Performance Summary



I am pleased to present the Society’s 152nd Annual Report & Accounts for the year ended 31 December 2017. It has been a year of good financial results and substantial progress. The Society has made great strides on a number of fronts while, at the same time, laying down firm foundations for a prosperous and secure future.

Consolidation and Development In my Annual Report for 2016 I described a year of considerable change. Recognising the challenges that lie ahead of the Society – rising member expectations, tougher competition and tighter regulation – your Board initiated a programme of change designed to ensure that the Society thrives in the years ahead. In 2017 we consolidated and developed those changes, building on the substantial progress that has been made in management strength, IT infrastructure and market presence.

At the same time, overall lending growth and financial performance in 2017 were strong. Mortgage balances grew by over 9.7% (1.2%: 2016) in a very challenging market, supporting an improved profit after tax of £3.2m (£1.1m: 2016). Group reserves increased by £3.9m to both support future lending growth and deliver additional capital strength that exceeds regulatory requirements. Measured growth was achieved in savings share balances of £4.1m (reduction of £28.3m: 2016).

The Board’s policy is to run the Society conservatively, maintaining a strong balance sheet with high capital ratios, adequate liquidity and a low risk mortgage book.

Investing for the FutureIn April the Board was very pleased when Chris Harrison joined the Society as Chief Executive. Chris has wide experience of financial services. Most recently he was Chief Executive of a major European subsidiary of Assurant Inc, the Fortune 500 American insurance company. Earlier in his career he had been Managing Director of a leading mutual health insurer. He brings a strong combination of commercial and mutual experience to his role that will help the Society blend the strengths of commercial discipline with the mutual values that are important to our members.

As reported in last year’s Annual Report, Matt Dobson joined the Society as Finance Director in January 2017. Matt is well qualified for the role. He was Head of Debt Capital Markets at Williams & Glyn and, before that, Head of Capital & Leverage Management at Barclays Bank. We were pleased to welcome Matt to the Board. He is already making a discernible impact on the financial leadership of the Society.

To further strengthen management capacity, the Society created two additional Executive roles, Chief Risk Officer and Chief Compliance Officer. These roles are designed to ensure that the Society pursues sound strategies in a rapidly changing market environment. Financial services risk management is a specialised discipline and the Society will be filling the Chief Risk Officer role with an externally recruited risk specialist who will take up his post in April. For the Chief Compliance Officer role the Society had a well-qualified internal candidate, Pam Mawson, who will combine the role with her existing responsibilities as Group Secretary. In addition, a Director of Operations and Change has joined the Society to provide expert guidance and assist the organisation with a programme of change to improve operational efficiency and service.

At senior management level the Society recruited a new Chief Information Officer, a new Head of Intermediary Sales who is due to take up his role in early 2018, a new Head of Product Marketing and a new Financial Planning & Analysis Manager. A number of further appointments are in the pipeline. All these appointments are being made within tight financial discipline that should see the Society’s Management Expense ratio continue to improve over the course of 2018.

With this significantly strengthened Management team, the Board believes the Society will have the capability and agility to meet the challenges that lie before us.

Sound Financial StrengthMaintaining and improving the Society’s capital and liquidity positions remain core priorities for the Board to ensure the Society can protect members’ interests in the event of adverse economic circumstances. Improved profitability in 2017 increased the Society’s reserves to £66.7m by the year end (£62.8m: 2016) and our common equity tier 1 ratio to 20.46% (19.25%: 2016). The Society’s liquid assets ratio as a percentage of shares and borrowing increased to 15.85% at year-end (£15.39%: 2016), supporting a prudent level of

Chairman’s Report




available liquidity in line with 2017 balance sheet growth. We were accepted into the Bank of England’s Term Funding Scheme during the year, drawing £45m of funding as at 31 December 2017 in order to support our overall liquidity and funding position.

Arrears over 90 days were at 0.02% of mortgage assets (0.03%: 2016) and at the year end the Society had just 5 (1: 2016) properties in possession, highlighting the credit quality and continued positive performance of our overall mortgage book.

The Society’s reported defined pension scheme liability under FRS 102 reduced year on year to £4.3m (£5.7m: 2016) resulting from updated actuarial assumptions, cash contributions and the impact of lower service costs as the scheme is now closed to further accrual.

The Society remains in a very financial position and well placed to manage potential economic headwinds that might arise in the future.

Business PerformanceMortgage lending and retail savings performance in 2017 was very good. Gross lending totalled £209m (£167m: 2016), above our on-going market share and one of the highest figures the Society has ever achieved. Net mortgage balances grew £68m (£11m: 2016) to £764m (£696m: 2016). This represented growth in mortgage balances of over 9.7% (1.2%: 2016). Savings balances also showed positive growth. Net retail share inflow of £4m (reduction of £28m: 2016) was achieved bringing total balances to £683m (£679m: 2016). This represented growth of 0.6% (reduction of 4.0%: 2016).

These results were achieved against the background of a very difficult market. Total mortgage balances for the market as a whole grew by only 3.1% (2.7%: 2016) and total savings balances grew by only 2.5% (5.8%: 2016). The housing market was very subdued and, as a result, lending for house purchase was also subdued. Gross mortgage lending was driven predominantly by re-mortgaging.

Profit before tax in 2017 of £4.1m showed a significant improvement on 2016 (£1.1m). This includes Net Interest Income credit of £1.2m relating to a reassessment of our effective interest rate (EIR) reporting on our mortgage book held at the start of the year and an impairment loss of £0.7m following a review of the Group’s freehold premises. Excluding this item, profit before tax was £3.6m. The annual profit after tax of £3.2m generated a positive increase in capital for the Society to both invest in future growth and to support our financial strength. Administrative expenses including depreciation reduced by £0.4m compared to 2016 (£1.1m excluding impairment loss) driven by reduced non-recurring costs and improvements made in managing our underlying cost base. As a result the Society’s management expenses ratio reduced by 0.06% to 1.38% of mean assets (reduced by 0.14% to 1.30% excluding impairment loss). Net interest margin continued to remain under pressure but, despite the challenging market, net interest income of £15.7m (£14.5m on an unadjusted EIR basis) was achieved in the year (£13.6m: 2016), reflecting strong mortgage growth and a net interest margin as a percentage of mean assets at 1.83% (1.69% on unadjusted basis) – an increase on the prior year. Delivering an acceptable level of net interest income remains a key focus for the Society in order to maintain its long term financial strength, while balancing the expectations of our of savings and mortgage customers.

For the greater part of the year mortgage and savings interest rates, that had started the year at a historically low level, declined somewhat further. This was particularly hard on savers and, although the Society had to follow the market in setting rates throughout the year, it did all it could to minimise the impact on members who save with us. It is the Society’s policy to balance the interests of savers and borrowers to be fair to both but clearly the Society has no control over the overall level of interest rates in the economy. Towards the end of the year the 0.25% increase in bank base rate announced in November, the first bank base rate increase in 10 years, started to feed through to market rates. As a result, we were able to increase rates across access, notice and ISA accounts as well as our fixed bond offerings delivering improved returns for savers. The Society anticipates further measured increases in rates in 2018.

Business StrategyThe Society faces competition from large established banks and building societies with substantial resources. We also face competition from an unprecedented number of agile and well capitalised new ‘challenger’ banks. We have to fight ever harder for our share of our core markets. And then there is technology. Technological innovation will bring benefits to our members and offer the Society scope for much greater efficiency – but it will almost certainly also bring significant disruption. We have seen the disruptive impact of technology in other markets. We need to be ready to meet these challenges in our markets. To do that we need clear strategic leadership, financial strength and a highly capable workforce.

The Board recognises that the future prosperity of the Society depends on the successful delivery of a distinctive and relevant customer focussed proposition in an increasingly competitive market. Giving the Society’s proposition, clarity and definition will become increasingly important in the years ahead.

The foundation of the Society’s business is the provision of high quality mortgage, savings and related products that offer our members good value over the long term, based on excellent customer service that distinguishes the Society from other financial institutions.

Chairman’s Report continued



Today, we source the greater part of our mortgage lending from the intermediary market with product development, marketing support and service designed to actively support brokers in meeting the needs of their clients and so developing their businesses. Direct mortgage customers have access to an advised mortgage service. There is potential for new technologies to disrupt this structure of mortgage distribution and we monitor developments closely to ensure that we will be able to continue to support our customers, introducers and other business connections in the future. The Society’s product focus is mainstream lending, lending to non-standard customers with more complex needs and underserved markets.

The Society funds its lending through retail savings products principally sourced through the branch and agency network, with additional funding through postal and internet channels as required. Wholesale funding is used tactically to manage variations in retail funding and cost. The Society participates in the Term Funding Scheme.

The overall key strategic objective is to grow the business steadily. The Board believes a sustainable business model with a focus on income growth and cost management can be maintained through successful delivery of the above strategies. The Board is committed to protecting the Society’s capital strength and to securing its future as an independent mutual building society.

Board of DirectorsThe Society bases its corporate governance arrangements on the most recent version of the UK Corporate Governance Code. Using guidance provided by the Building Societies Association, the Society has either complied with the Code or explained the position in this Annual Report.

In addition to the Executive appointments described earlier in my report, some Non-Executive changes were also announced. Kim Kearney will retire from the Board in March 2018 to spend more time on her expanding business interests. Kim has served for two terms of three years, most recently as Vice Chairman and Chairman of the Remuneration Committee, and both of these roles will be undertaken by Kim Rebecchi.

Andrew Haigh will retire from the Board in April this year following his decision to move home to the south of England. Andrew has served for four years, most recently as Senior Independent Director and Chairman of the Board Risk Committee. Andrew’s role as Senior Independent Director will be assumed by Nic Gower and his role of Chairman of the Board Risk Committee will be undertaken by Phillip McLelland.

Both Kim and Andrew have made a significant contribution to the Society, particularly in the leadership of the Committees of which they were Chairmen and I should like to place on record the Board’s thanks for the difference they have made. My own retirement also takes place in a year’s time, at the Annual General Meeting in 2019, and the Society has a programme of recruitment underway with a leading firm of headhunters to fill these three vacancies.

I should also like to place on record the Society’s thanks to Mike Kirsch who served as Interim Chief Executive from April 2016 to April 2017. Mike dealt effectively with a number of significant legacy issues and the Society made good progress under his leadership.

In ConclusionThe outlook for the mortgage and savings markets remains extremely competitive. In addition there are a number of potential economic headwinds and uncertainties as we move into 2018 – UK economic growth, Brexit outcome and impact, customer affordability pressures and housing supply and prices. The Society is well positioned to meet these challenges. We have measured growth targets in both mortgages and savings. We continue to run the Society conservatively to improve profitability and financial strength. The pricing of our mortgage and savings products – getting the right balance for all our members while maintaining our profitability/financial strength – is a key focus. Management continue to work to deliver business and cultural change and operational efficiency across the business – adapting to new market and customer requirements, executing key projects and developing management capability to meet increasing member, market and regulatory standards. Delivery in these areas will help ensure the long term success of the Society.

I should like to thank my fellow Board members, the Society’s staff, our agents, introducers and other business connections for their continued commitment to the Society. They have all made a huge contribution to the success of the Society during the past year. Lastly, and most importantly, I should like to thank our members for their support. I hope they believe that we are running the Society well on their behalf. I encourage them all to attend the Annual General Meeting on 24 April to hear at first-hand what was achieved in 2017 and what is planned for the future. C S Millar Chairman 7 March 2018

Chairman’s Report continued




Directors’ ReportThe Directors have pleasure in presenting the 152nd Directors’ Report for the year ended 31 December 2017.

Business Objectives and ActivitiesThe Chairman’s Report on pages 5 to 7 includes details of the Society’s business strategy and core objectives for 2018. The operational entities within the Group comprise Furness Building Society and Furness Mortgage Services Limited.

The Society exists for the benefit of its current and future members, to meet their needs for savings and mortgages. The Society is committed to remaining independent and mutual for this purpose.

The Society operates within a legal framework with statutory limits set by the Building Societies Act 1986 to ensure a focus on its prime objectives of deposit taking and mortgage lending. Within this framework the Board operates a simple business model, operating solely within the UK with a robust risk management framework. In order to ensure the business model remains sustainable, capital generation is required to support growth.

The Society’s focus in 2018, as articulated in the Corporate Plan, will be:

• to continue to help customers buy their own residential properties by providing high quality mortgage products, primarily through the intermediary distribution channel but also through our branch and agency network, principally funded through retail savings;

• to achieve sustainable and profitable growth during the Corporate Plan period with effective use of capital;• to drive organisational efficiency;• to create a customer focussed culture that meets changing market and regulatory requirements.

Business ReviewThe 2017 Chairman’s Report includes a section headed Business Performance which provides a review of the business during 2017. In addition, the following matters are considered by the Board:

• Capital/Reserves and Profits The Board considers that the maintenance of adequate capital (reserves) is of paramount importance to protect the Society’s

members from any unexpected adverse situations. When assessing the adequacy of its capital, the Board considers the material risks to which the Society is exposed and the need for capital to be available to support and grow the business.

The Group’s level of capital remains in excess of the minimum required by our Regulators and the Society is strongly capitalised with a common equity tier 1 ratio of 20.46% at 31 December 2017.

The Group’s Pillar 3 disclosures, which set out the Society’s total capital requirements and risk management policies and objectives, can be found on the Society’s website www.furnessbs.co.uk. This information is updated annually after the Society’s Annual General Meeting.

The Society generated higher profit before tax in 2017 £4.1m (£1.1m: 2016) mainly as a result of increased mortgage assets and interest receivable and a reduction in costs year-on-year. Reported profits for 2017 included a credit to net interest income of £1.2m relating to a reassessment of our effective interest rate (EIR) reporting approach on our mortgage book held at the start of the year and an impairment loss of £0.7m following a review of the Group’s freehold premises.

• Net Interest Margin The Group’s net interest margin represents the surplus that remains of its interest income (mortgage interest and interest earned

on the Group’s investments) after deducting the Group’s funding costs in the form of retail share and deposit interest, non-retail funds interest and subordinated debt interest. The mortgage market remains very competitive and the Society’s net interest margin is affected largely by the resulting pressures.

The responsibility to produce an appropriate level of net interest margin to maintain the Society’s capital strength continues to be a key consideration when setting interest rates. The Society’s pricing policy was further developed in 2017 to improve product value and governance. The Board strives to balance the expectations of our saving and borrowing members wherever possible and to act fairly. The mortgage and savings rates were increased in December 2017 following the change to the Bank of England base rate. The Board carefully considered and balanced members’ interests.



Directors’ Report continued

A net interest margin of £15.7m was achieved (£13.6m: 2016). The net interest margin expressed as a percentage mean total assets was 1.83% (1.61%: 2016). Excluding the EIR credit of £1.2m noted above, the adjusted 2017 net interest margin was £14.5m (1.69% as a percentage of total mean assets).

• Other Income, Fees and Commissions The Group generated other income (non-interest) from the provision of services that are related and complementary to its core

activities of mortgage lending and the provision of savings products. This included income from a variety of insurance related products (buildings & contents) provided to our members through our partnership with Uinsure and a proportion of sales proceeds following the sale of the Furness Financial Advisers Limited client base in 2016.

• Arrears and Provisions On occasion, borrowers experience difficulties which impact on their ability to meet their mortgage obligations. The Society

identifies borrowers whose mortgage accounts have gone into arrears and makes contact to ascertain the reason for the arrears and to establish what course of action can be taken to bring the accounts up to date.

Despite the Society’s best efforts to help borrowers in such circumstances, occasionally properties have to be taken into possession and sold, sometimes at a loss to the Society.

At the end of the year, there were 9 cases (16: 2016) where repayments were twelve months or more in arrears. The total amount of arrears on these cases was £71k (£101k: 2016). Balances on accounts twelve months or more in arrears totalled £324k (£613k: 2016). At 31 December 2017 the Group’s total provisions represented 0.15% of total mortgage assets (0.22%: 2016).

The Group continues to follow a prudent lending policy and following the Board’s assessment of the Society’s credit risks and the economic environment, the Group holds impairment allowances of £1.1m (£1.5m: 2016), based on a conservative view of the stability of the housing market and economy. In common with all lenders, future changes in house prices, unemployment levels and other economic factors may give rise to the need for additional or reduced provisions.

In certain circumstances the Society uses appropriate forbearance measures to assist borrowers who are experiencing financial difficulty. Such measures to reduce the borrowers’ financial pressures include, amongst others, agreeing a temporary transfer to interest only payments or requests to amend terms of the mortgage. The Society expects borrowers to resume normal payments once they are able. Where the Society expects a loss, a provision is made in accordance with the Society’s policy.

During 2017, the Society undertook forbearance measures on 181 (230: 2016) mortgage accounts that had balances totalling £9.9m (£14.3m: 2016) as at 31 December 2017. 66 of these cases were new during 2017 (92: 2016) with total balances of £3.5m as at 31 December 2017 (£6.6m: 2016).

As at 31 December 2017, the Society was still undertaking forbearance measures on 61 (91: 2016) accounts with arrears totalling £104k (£186k: 2016) and balances totalling £3.3m (£5.7m: 2016). Of the accounts still under forbearance as at 31 December 2017, individual provisions totalling £421k (£136k: 2016) were made in relation to 13 (17: 2016) accounts that had arrears totalling £19k (£39k: 2016) and balances totalling £1.7m (£2.1m: 2016). The Society held 5 properties in possession as at 31 December 2017

• Liquidity At 31 December 2017, the Group’s liquid assets were £130m (£114m: 2016) and as a percentage of share and deposit liabilities,

liquidity represented 15.85% (15.39%: 2016).

The Society manages its liquidity requirements on an ongoing basis via a number of internal and regulatory defined stresses and risk appetite limits to ensure prudent levels are maintained.

The return on liquid assets totalled £0.4m (£0.8m: 2016). During the year the Group adhered to a conservative risk approach to the investment of surplus funds, investing these with the Bank of England, large UK based reputable banks and in liquid AAA rated bonds. The Society also participates in the Bank of England’s Term Funding Scheme.




Directors’ ReportRisk ManagementThe Society has a formal risk management framework including a detailed Board Statement of Risk Appetite overseen by the Board Risk Committee, to address its objective of managing the risk associated with current and future activities of the Group.

The main uncertainties affecting the Society are considered to relate to the current economic environment which has a direct impact on saving members’ sentiment regarding saving and on borrowers’ ability to meet their mortgage commitments. The housing market is beginning to show signs of slowing and the impact of ‘Brexit’ remains uncertain. However, we are confident that the Group has sufficient resources to mitigate the wider economic challenges.

The Society has taken steps to increase the credit risk management resources for 2018.

The Group faces a variety of risks, which fall into the following categories:

• Credit Risk This is the risk that borrowers or counterparties to whom the Society has lent money may default on their obligation to repay the

Society. The Society manages the risk associated with mortgage borrowers by means of a prudent lending policy that includes both an assessment of the creditworthiness of the borrower and the value of the proposed security. Mortgages are monitored closely on an ongoing basis with timely action being taken for those mortgages that fall into arrears. The Credit Risk Committee meets regularly to consider the risks associated with this lending and reviews large and potential default accounts.

In the case of liquid asset investments, the credit risk associated with lending to financial institutions is addressed by the Society’s Assets and Liabilities Committee (ALCO) which ensures that lending is restricted to Bank of England Reserve Account, UK Government issued debt instruments, large UK based banks with quality credit ratings or those guaranteed by the UK Government and building societies which are all regulated by the Prudential Conduct Authority and Financial Regulation Authority. In addition the Society has a limited supranational exposure with the European Central Bank.

The Society keeps abreast of developments affecting financial sector firms and takes appropriate action to safeguard the Society’s investments.

• Liquidity and Funding Risk The nature of the Society’s business is ‘maturity transformation’ whereby the Society borrows for relatively short terms and lends

on mortgages for much longer periods. This mismatch creates liquidity risk whereby the Society could be unable to meet its financial obligations as they fall due.

Funding risk is the inability to access funding markets or to do so at excessive cost. In order to minimise funding risk the Society ensures there is no over reliance on one source of funds.

The purpose of the Society’s Internal Liquidity Adequacy Assessment Process (ILAAP) is to ensure that these commitments can be met in a timely manner and that the Group maintains the confidence of its existing and potential investors and suppliers. On a day to day basis the Group’s liquidity position is managed by the Treasury function which is responsible for the liquid asset portfolio and contingency arrangements. Liquidity and funding risk is monitored by the ALCO which meets on a frequent basis and receives a variety of management information reports which enable it to monitor the amount and composition of the liquid asset portfolio and ensure Group compliance with the regulations covering liquidity as well as the Risk Appetite Statement of the Group.

• Market Risk Market risk relates to the potential for loss on the sale of a financial instrument as a result of a change in the price of that instrument.

The Society does not take speculative views on future interest rate movements when investing the Society’s surplus funds. The Society does not actively trade financial investments, other than for regulatory liquidity testing, and principally aims to hold any investments to maturity.

• Treasury Risk Management and Interest Rate Risk This refers to the risks associated with the Society’s treasury management activity. This activity covers the investment of the

Society’s surplus funds and the execution of derivative transactions to hedge the Society’s fixed rate products or ensures that they are naturally hedged across the balance sheet. The Society operates a conservative and risk averse Treasury policy supported by a number of risk appetite limits which the ALCO monitors to ensure that the interest rate risk to which the Group is exposed, on both sides of the balance sheet, is adequately controlled.




• Operational Risk This relates to the risk of loss as a direct result of failed systems and procedures and includes items such as defective title or

money transmission errors. The operational risks faced by the Group, are assessed on a regular basis and an appropriate system of control exists to mitigate these risks. This control system is reviewed by internal audit on an ongoing basis. In addition, the Society considers succession planning to mitigate the key personnel risk.

The risk of data loss as a result of cyber security risk is a growing risk which the Society takes extremely seriously. The Board will be further investing in IT infrastructure during 2018 in order to continue to protect our customers’ data.

• Conduct Risk Conduct risk can be defined as the risk that the Society’s behaviours fail to deliver good and acceptable customer outcomes.

In recent years the financial services industry as a whole has accrued reputational damage due to the level of redress which has been necessary to compensate customers for conduct failings and therefore conduct risk and culture are a particular focus for the Financial Conduct Authority.

The Board has primary responsibility for ensuring that the manner in which the Society conducts dealings with its customers is fair and in their interests. Not only does the ethos of ‘Always with your interest at heart’ embed this culture throughout the Society, but a dedicated Committee considers matters that would impact upon treating customers fairly.

• Regulatory Risk This is the risk that the volume, prescription, complexity and costs of regulatory issues may impact upon the Group’s business

model and ability to compete or that the Society is not compliant with relevant regulations which govern our business.

The Society monitors all regulatory developments and industry practices and following assessment of the impact and requirements for the Society ensures appropriate management action is taken for the Society to remain compliant.

• Capital Risk Capital risk refers to a situation where an event(s) occurs that reduces the Society’s capital to an unacceptable or unsustainable

level. The Society regularly tests various scenarios to ensure it retains sufficient capital to manage foreseeable and possible events.

The Society’s Internal Capital Adequacy Assessment Process (ICAAP) is the Society’s evaluation of its capital position and requirements and sets out the approaches to manage capital risk across the planning horizon including the evaluation and monitoring of risk appetite limits.

• Pension Risk The Society operates a pension scheme that provides benefits based upon final pensionable pay. This scheme was closed to new

entrants in September 2000 and closed to future accrual with effect from 1 January 2017.

The scheme deficit decreased during 2017 by £1.4m to a total deficit of £4.3m. There is a risk that this will increase in future and whilst the Group has the financial strength to absorb these deficits, the scheme liability remains a significant potential risk to the Group. However, the action taken to close the scheme to future accrual has limited the risk of a further increase to the existing liabilities.

The Society will continue to investigate ways to reduce the Society’s exposure to this liability during 2018 and will reassess the current level of pension scheme contributions with the Trustees during 2018 as part of the triennial valuation.

• Financial Services Compensation Scheme Risk In common with all regulated UK deposit takers, the Society has a liability to the Financial Services Compensation Scheme (FSCS)

which continues to be an uncertain cost. The failure of any other firms covered by the Scheme could also add to the existing liability. A charge of £5k (£168k: 2016) has been recognised in the Society’s 2017 financial statements relating to the FSCS levy.





• Strategic Risk This is the risk that circumstances prevent the Society from achieving its long term strategic objectives. Inability to deliver a long

term strategy threatens the future of the business. Strategic risk can arise from staff making poor decisions, inadequate capacity or capability to manage change, or from a failure to respond to changes in the business environment.

The Society reviews its strategy at least annually to ensure it remains appropriate, deliverable and sustainable and seeks external assistance when required to validate decisions. The ongoing management of strategic risk is supported by the business performance and risk reporting data provided to the Board and Risk Committees.

Going ConcernThe Directors have reviewed the Group Corporate Plan including related cash flow projections and 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 financial statements.

Long Term ViabilityIn accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have considered the prospects of the Society over a longer period than the twelve months required by the going concern provision. Three years represents the Society’s Corporate Plan period.

The Directors’ assessment is based on the 2018 Corporate Plan which projects the Society’s ongoing capital, profitability and funding position to be strong at the end of a three year period (31 December 2020). This assessment is further supported by the ICAAP and ILAAP and Recovery and Resolution Plan (RRP).

The Corporate Plan has considered adverse sensitivities and although there are inherent uncertainties in the geopolitical, economic and regulatory environments over the planning period, the Society’s reverse stress tests indicate that in plausible scenarios we could continue to conduct business.

Based on the information available and assumptions made in terms of the unknown factors, the Board have a reasonable expectation that the Society will be able to operate and meet its liabilities for the foreseeable future.

PeopleThe Society recognises that talented and dedicated staff are key to the success of the Society and its long term future.

In order to ensure the Society’s long term success, the Board is investing in key skill areas to recruit and retain high calibre staff and strengthen the management capability and capacity. It is vital that the Society employs and develops people with the skills and motivation to take the Society forward.

The Board is committed to this investment in people to provide the solid foundations the Society needs to build on and secure a successful future for the Society and its members.

Events since the Year-End / Future EventsThe Directors do not consider that any event since the year-end has had a material effect on the position of the Group.




DonationsDuring the year, the Society made various donations to a variety of good causes, of which £9k (£8k: 2016) was donated purely for charitable purposes. This sum was in addition to affinity account payments totalling £270k (£597k: 2016) and other donation and sponsorship payments totalling £13k (£14k: 2016) to charities and other local community organisations.

Organisations that received donations are detailed on the Society’s website.

The Society allows employees time to support charitable efforts during the year and a number of employees were assisted in this way during 2017.

Supplier Payment PolicyThe Group’s policy is to discharge supplier invoices within the agreed payment terms when they fully conform with the terms and conditions of the purchase. The average time to settle invoices over the year was 20 days (20 days: 2016).

DirectorsDirectors who served during the year are listed on page 27 within the Corporate Governance Report. None of the Directors had an interest in shares or debentures of any associated body of the Society at any time during the financial year.

Disclosure of Information to AuditorsThe Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Society’s website. Legislation in the UK governing the preperation and disemination of financial statements may differ from legislation in other jurisdictions.Each of the persons who is a Director at the date of approval of this report confirms that:• so far as the Director is aware, there is no relevant audit information of which the Group’s auditor is unaware; and• the Director has taken all the steps that should be taken by a Director in order to be aware of any relevant audit information

and to establish that the Group’s auditor is aware of that information.

Approved by the Board of Directors on 7 March 2018

C S Millar Chairman 7 March 2018




Statement of Directors’ ResponsibilitiesDIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT, THE ANNUAL BUSINESS STATEMENT, THE DIRECTORS’ REPORT AND THE ANNUAL ACCOUNTS

The Directors are responsible for preparing the Annual Report, Annual Business Statement, Directors’ Report and the Annual Accounts in accordance with applicable law and regulations.

The Building Societies Act 1986 (‘the Act’) requires the Directors to prepare Group and Society Annual Accounts for each financial year. Under that law they have elected to prepare the Group and Society Annual Accounts in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS102 - The Financial Reporting Standard applicable in the UK and Republic of Ireland.

The Group and Society Annual Accounts are required by law to give a true and fair view of the state of affairs of the Group and of the Society as at the end of the financial year and of the income and expenditure of the Group and of the Society for the financial year.

In preparing the Group and Society Annual Accounts the Directors are required to:

• select suitable accounting policies and then apply them consistently;• make judgements and estimates that are reasonable and prudent;• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and

explained in the Annual Accounts;• prepare the Annual Accounts on the going concern basis unless it is inappropriate to presume that the Group and Society will

continue in business.

In addition to the Annual Accounts, the Act requires the Directors to prepare, for each financial year, an Annual Business Statement and a Directors’ Report, each containing prescribed information relating to the business of the Group.

DIRECTORS’ RESPONSIBILITIES FOR ACCOUNTING RECORDS AND INTERNAL CONTROLS

The Directors are responsible for ensuring that the Group:

• keeps proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and Society, in accordance with the Act;

• 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 Conduct Authority and Prudential Regulation Authority under the Financial Services and Markets Act 2000.

The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Society’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.



Nicholas John GowerNic was appointed to the Board in May 2014 as a Non-Executive Director and stands for re-election

in 2018. He was elected as Chairman of the Audit Committee following the 2016 AGM. Nic is also a member of the Society’s Board Risk Committee. Nic is a Fellow of the Institute of Chartered Accountants and has a BSc (Hons) degree in Chemistry from the University of Manchester. He spent most of his career as a partner with PriceWaterhouseCoopers LLP, specialising in audit and risk management. Nic is also a Director of the Manchester University NHS Foundation Trust and a Director of Seashell Trust,

which is a charity working for the benefit of children and young adults with complex learning disabilities. Nic believes the Society, with its firm commitment to independence and mutuality, will continue to be

successful for the benefit of its members.

Kim Susan KearneyKim was appointed to the Board in September 2011 as a Non-Executive Director. She was elected as

Vice-Chairman of the Board following the 2016 AGM and also held the position of Chairman of the Remuneration Committee until January 2018. Kim is a member of the Nominations Committee. Kim has a degree in Mathematics and has a wealth of experience following a career in IT. As well as managing major systems initiatives for large corporate organisations, Kim has also held senior general management roles in the Insurance industry, including a large mutual company. In retirement, Kim enjoys running a small business from her farm in the South Lakes and it is the expansion of her own

business which has led to her decision to retire from the Board in 2018. Kim fully appreciates the value of mutuality and the Society’s focus on putting members’ interests at the heart of what we do.

Christopher Michael HarrisonChris joined the Society in April 2017 as Chief Executive and has made a positive impact in many areas of the business. Chris stands for election at the 2018 AGM. Chris is Chairman of the Executive Committee and Assets and Liabilities Committee and as the Chief Executive attends all Board Committees. His previous roles include President and CEO of Assurant Solutions Europe and CEO of LSG Lifestyle Services Group. Chris is committed to building a modern, customer focussed building society which is relevant for its current and future customers, providing outstanding service and great value.

Colin MillarColin was appointed to the Board in September 2006 as a Non-Executive Director. He was elected Chairman of the Board following the 2014 AGM and stands for re-election in 2018. He is Chairman of the Nominations Committee and a member of the Audit Committee. Colin has a degree in Industrial Economics from the University of Nottingham. His early career was in brand marketing with Unilever, principally in the UK but he also worked for a time in Japan and East Africa. Subsequently he was a General Manager with Birmingham Midshires and Yorkshire Building Societies and Marketing Director

with The Mortgage Corporation. For 14 years he then owned and ran a company supplying marketing data to companies and trade organisations throughout the world. Colin is a strong supporter of the

building society sector and the role it plays in meeting people’s important financial needs.

Andrew John Haigh Andrew was appointed to the Board in January 2014 as Non-Executive Director. He was elected as Senior Independent Director and Chairman of Board Risk Committee following the 2016 AGM. Andrew is also a member of the Society’s Nominations Committee and Remunerations Committee. Andrew is a Fellow of the Institute of Chartered Accountants and holds a BA (Hons) degree in Economics and Accounting. He spent most of his career in senior positions at KPMG, specialising in IT, risk management and audit within the retail financial services industry and extensively in the building society sector. Following 20 years as partner he retired in 2008. Andrew is Chairman at Calderdale and Huddersfield NHS Foundation Trust. Andrew was pleased to join the mutual sector which performed strongly during a challenging period for the financial services industry. Andrew will retire from the Society’s Board in 2018 and is moving South to spend more time with family.

The Board of Directors and Secretary




The Board of Directors and Secretary continued

Pamela Adele MawsonPam joined the Society in 1988 and having held various managerial roles was appointed as the Group Secretary in 2015 and accepted the role of Chief Risk Officer in July 2016. Pam is a member of the Board Risk Committee, the Executive Committee and ALCO and a Director of the Society’s subsidiary companies. Pam also attends Audit Committee, Nominations Committee and Remuneration Committee. Pam has a BSc (Hons) degree in Financial Services and Associateship from the University of Manchester and a Diploma in Financial Services Management. Pam and her family have lived in Barrow–in-Furness

for many years and she is proud to work for her local building society where members’ interests are central to the culture of the organisation.

Matthew Jon DobsonMatthew was appointed to the Board in January 2017 as Finance Director and is a member of the Executive Committee and ALCO. Matthew also attends the Audit Committee and Board Risk Committee. Matthew is a qualified accountant and holds a BA Hons (Cantab). He has gained over 15 years banking experience in senior roles across both treasury and finance functions. His previous roles have included Directorships at Barclays and Head of Debt Capital with Williams and Glyn Treasury. Matthew grew up

in the Society’s heartland and is delighted to join a Society which is committed to its mutual status.

Kim Louise RebecchiKim was appointed to the Board in March 2016 as a Non-Executive Director. Kim is a member of the Board Risk Committee and was recently appointed as Chair of the Remuneration Committee and Vice-Chairman. Kim is a Fellow of the Chartered Institute of Bankers and she holds a post graduate Diploma in Financial Services. She worked at the Leeds Building Society for 28 years, most recently as the Sales and Marketing Director as an Executive member of the Board. Kim is also a Director for Redmayne Bentley Stockbrokers LLP, Business and Finance Ltd and the Bank of Cyprus UK. Kim

joined the mutual sector almost 30 years ago and is a strong supporter of mutuality and the benefits which can be offered to members and local communities.

Susan Jane HeronSue was appointed to the Board in 2008 as Group Secretary before being promoted to Executive Director in June 2015 as Marketing and Sales Director. Sue is a member of the Executive Committee and ALCO and a Director of the Society’s subsidiary companies. Sue holds a Foundation Degree and Diploma in Financial Services Management and has held a variety of positions within the Society in both the branch network and Head Office management team. Sue began her career with the Society in 1995 at Lancaster Branch and has seen first-hand the important role the Society plays in the local communities of the branch and agency networks.

Phillip Alexander McLellandPhillip was appointed to the Board in November 2016 as a Non-Executive Director and is a member of the Audit Committee and attends ALCO. Phillip has a BSc (Hons) degree in Economics from Loughborough University and is a member of the Chartered Institute of Management Accountants. He has proven commercial, finance and treasury skills and considerable experience in the financial services industry. Phillip fully appreciates the value of mutuality, having worked in the sector for many years, and firmly believes the Society’s focus on member value will ensure it continues to be successful in the future.



Corporate Governance ReportThe Board is committed to strong corporate governance.

The Board’s approach is based on the principles and provisions of the April 2016 UK Corporate Governance Code (‘the Code’) published by the Financial Reporting Council (the FRC) and a copy is available at www.frc.org.uk.

Furness Building Society and its subsidiary companies (‘the Society’) is not required to comply with the Code, as it is not a listed company, however the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) require each building society to have regard to the Code and to explain in its Annual Report and Accounts whether, and to what extent, it adheres to the Code.

This report sets out how the Board operates. The Board bases its corporate governance arrangements on the most recent version of the UK Corporate Governance Code. Using guidance provided by the Building Societies Association, the Society has either complied with the Code or explained the position in this Annual Report.

Our Governance Framework

The terms of reference for all the above committees are available to view at www.furnessbs.co.uk

LeadershipThe Role of the BoardThe Board is collectively responsible for the sustainable success of the Society. Its primary role is to challenge and approve the long-term strategy and provide leadership to ensure that the Society delivers long-term member value.

The Board has a number of specific responsibilities including:

• safeguarding the interests of members and ensuring the long-term success of the Society;• setting strategy and providing direction for the maintenance and development of the business model;• developing the culture and values;• determining and reviewing the Society’s risk appetite;• ensuring adequate resources exist to enable the achievement of corporate objectives;• ensuring that financial and operational risk management policies and controls are effective;• ensuring the satisfactory performance of the senior management team and its obligations under the senior management and

Certification Regime.

The Board operates under Terms of Reference and has established a framework of mandates which specifies those matters which are delegated and those which remain the responsibility of the Board. Matters reserved for the Board include setting the strategic aims, objectives and risk appetite for the Society. The balance and independence of the Board is kept under review by the Nominations Committee.

Chairman and Chief ExecutiveThe roles of the Chairman (Non-Executive) and Chief Executive are separate and there is a clear division of duties between them that is formally documented and which has been approved by the Board. Following the implementation of the regulatory Senior Manager and Certification Regime in March 2016, certain prescribed responsibilities were allocated to individual Directors which clearly describe accountabilities of both Non-Executive Directors and members of the Executive team.

Board

Audit Committee See page 22

Board Risk Committee See page 23

Nominations Committee See page 25

Remuneration Committee See page 26




Corporate Governance Report continued

As Chairman, Colin Millar is responsible for:• leadership and governance of the Board;• ensuring adequate induction, training and effectiveness of Board members;• setting the agenda, style and tone of Board discussions;• creating a culture of openness and debate;• ensuring that the Directors receive accurate and timely information;• maintaining constructive relations between Executive team and Non-Executive Directors;• managing strong relationship and performance oversight with the Chief Executive;• maintaining open and candid relationship with the Regulatory authorities;• communicating with the Society’s members on behalf of the Board.

The Chief Executive, Chris Harrison was appointed in April 2017 and took over from Interim Chief Executive, Mike Kirsch. Chris is primarily responsible for the day-to-day management of the Society and its subsidiaries and for implementing the strategies and policies agreed by the Board.

Vice ChairmanKim Kearney held the role of Vice Chairman during 2017. Following her retirement from the Board in March 2018, this role will be undertaken by Kim Rebecchi. This is an important role to provide support and guidance to the Chairman and deputise as necessary.

Senior Independent DirectorAndrew Haigh acts as Senior Independent Director which is a regulatory Senior Management Function (SMF) and carries prescribed responsibility.

The role provides an intermediary channel between the Chairman and the other Directors as required and a point of contact for members should the normal channels of communication with the Chairman, Chief Executive or other Directors be inappropriate or fail. The Senior Independent Director also acts as the Whistleblowing Champion in addition to managing the appraisal process of the Chairman.

Andrew Haigh will retire from the Board following the Annual General Meeting in April 2018 and Nic Gower will take over as Senior Independent Director.

Non-Executive DirectorsThe role of each Non-Executive Director is to use their own experience and skills to bring independent judgement to Board debate and decision-making and to constructively challenge the Executive Management team.

All Non-Executive Directors are required to fully understand, challenge and assist in the development of the Society’s business model and strategy. They provide commercial leadership within a framework of prudent and effective risk management controls and retain an independent view and monitor performance and resources.

The Non-Executive Directors hold at least one meeting each year in the absence of the Executive Directors.

EFFECTIVENESSBoard Size, Composition and Independence At the end of 2017, the Board comprised nine members: the Chairman, five Non-Executive Directors and three Executive Directors. The Chief Executive, Chris Harrison and Finance Director, Matt Dobson joined the Board as Executive Directors in April 2017 and January 2017 respectively.

The Board would like to record its thanks to Mike Kirsch who served as Interim Chief Executive for a twelve month period before handing over to Chris in April 2017. Mike dealt with a number of significant legacy issues during his tenure and the Society made good progress under his leadership.




The structure of the Board continues to ensure that no individual or group of individuals is able to dominate the decision making process and no undue reliance is placed on any individual. During 2017 the Board has focussed on strengthening the Senior Management team to provide greater efficiency and the skills required to meet the complexity of the Society’s business environment.

The Executive team will be further strengthened in the Risk and Operations areas during 2018 with the appointment of a Chief Risk Officer and Director of Operations and Change.

Any individual carrying out the role of Director with prescribed responsibilities requires approval to do so from the PRA and FCA and the Society’s relevant Directors are therefore approved to hold Senior Management Functions. Details of the individual Directors and their biographies are set out on pages 15 and 16.

The Board, through the Nominations Committee, has assessed the independence of each of the current Non-Executive Directors (excluding the Chairman) and is of the opinion that each one of them acts in an independent and objective manner and therefore, under the Code, is free from any relationship which could affect their judgement.

In reaching this opinion the Board considered:• whether each Director is independent in character and judgement;• how each Director conducts themselves in Board and Committee meetings;• whether the Director has any interests, which may give rise to an actual or perceived conflict of interest;• whether the Director acts in the best interest of the Society and its members at all times.

Meetings and AttendanceThe Board held 11 scheduled meetings in 2017, including one formal strategy meeting. Full details of attendance at Board meetings can be found on page 27.

The Directors receive detailed papers in advance of each Board meeting. The agenda is developed by the Chairman and the Group Secretary in consultation with the Chief Executive.

The annual schedule of Board meetings is decided well in advance to ensure the availability of Directors. All Directors are expected to attend all meetings, however in the event of any Director being unable to attend a meeting, they receive papers in the usual way and have the opportunity to raise points in advance for consideration at the meeting.

Induction and DevelopmentThe Chairman ensures that, on appointment, all Non-Executive Directors receive a tailored induction programme. The programme is comprehensive and includes site visits, coverage of the regulatory environment, the Society’s systems and controls framework and business plans.

All Non-Executive Directors are required to maintain and update their skills and knowledge which they achieve through attendance at internal and external presentations, courses and seminars. Non-Executive Directors also make adhoc visits to branches and Head Office departments.

During 2017, Director briefing sessions were held covering a number of key Board issues and critical documents in addition to strategy development sessions. The training included Credit Risk and Cyber Risk in addition to Treasury Risk Management, Individual Capital Adequacy Assessment Process (ICAAP) and Capital Management.

Training and development records are maintained by individual Directors and are reviewed at least annually by the Nominations Committee and also by the Chairman during the individual annual performance appraisal process.

The Group Secretary is responsible for governance and ensuring that the Board procedures and Society rules are observed. All Directors have direct access to the services and advice of the Group Secretary. Directors are also able to take independent external professional advice to assist with the performance of their duties at the Society’s expense.





Board EvaluationThe Board undertakes to evaluate its performance on an annual basis.

In 2017, Board effectiveness formed part of a regulatory review during the annual supervisory assessment and the Board decided not to conduct a formal internal review for the same period. An independent firm will be appointed to undertake the review in 2018. It is the Board’s opinion that the Board and its Committees continue to be effective.

In addition to the Board evaluation process, the Senior Independent Director led a separate review of the Chairman’s performance. The performance review process sought feedback from all Directors by way of a confidential questionnaire. The feedback provided was used by the Senior Independent Director to inform a discussion session with the Chairman. The Senior Independent Director, in the absence of the Chairman, subsequently reported back to the Board on his performance review, which confirmed the Chairman had performed effectively.

The annual process for the performance evaluation of individual Directors is undertaken by means of an internal self-assessment questionnaire and a meeting with the Chairman. The 2017 performance evaluations concluded that all Directors continue to perform effectively.

Appointments, Elections and Re-electionThe appointment of Directors is governed by the Society’s Rules. Under the Rules, the Board may appoint a Director to fill any vacancy which occurs during the year. All new Directors, appointed in this way, are subject to election by members at the next appropriate Annual General Meeting following their appointment. The Board is recommending Chris Harrison to the members for election as an Executive Director at the 2018 Annual General Meeting.

Also under the Society’s Rules, Directors have to submit themselves for re-election at least once every three years. Non-Executive Directors are not usually expected to serve more than two full three-year terms following their first election to the Board. The Chairman is subject to annual re-election due to his length of service.

The Board will only recommend to members that Executive and Non-Executive Directors be proposed for re-election at an Annual General Meeting after evaluating the performance of the individuals. Following the performance evaluations the Board is recommending Colin Millar and Nic Gower for re-election by the members, having concluded that each individual continues to be effective and to demonstrate commitment to the role.

RELATIONS WITH MEMBERSMember EngagementAlthough the Society does not have a formal member engagement policy, the Board seeks to understand the needs of members and wishes to maintain and extend close relations with them. Members are encouraged to attend the Annual General Meeting, where they can ask questions and voice their opinions. In 2017, the Society continued to be active in local communities with its ‘150 year charity giveaways’ and the affinity partnership donations. The Board were pleased to note that Poulton Branch staff won a community award for their contribution locally.

Annual General MeetingAt the Annual General Meeting, Board members give presentations on the previous year’s financial performance and on the Society’s future plans. Members have the opportunity to ask questions of any member of the Board, the Group Secretary or the external audit attendee on any aspect of the Society’s business, or on the resolutions proposed at the Meeting.

Each year a notice of the Annual General Meeting is given to all members who are eligible to vote. Members are sent voting forms and are encouraged to vote online, by post, at a local branch or in person or by proxy at the Meeting. All members of the Board are present at the Annual General Meeting each year (unless their absence is unavoidable).

At the Meeting, separate resolutions are considered for each substantially separate issue and the results of the vote are displayed on the Society’s website throughout the year.




ACCOUNTABILITYRisk Management and Internal Control 3 lines of defenceThe Board has overall responsibility for maintaining a system of internal control to ensure that an effective risk management and oversight process operates across the Society.

The risk management framework is designed to identify, understand and monitor the risks within the business, including risks to which the Society may become exposed, and manages rather than eliminates risks to meet the Society’s business objectives.

The Society uses the industry standard 3 lines of defence model for the management of risk:

• Line 1 – Business Operations Business Areas – the first opportunity to identify risks and put in place steps to mitigate them as necessary. Management has

delegated responsibility to identify and evaluate the risks within their business areas and ensure controls are operating effectively over those risks, such that the Society meets the aim of its internal control system and operates within the risk appetite agreed by the Board. The delegated management responsibility extends to activities undertaken by outsourced relationships.

• Line 2 – Oversight Functions Risk management committees and related functions (eg Compliance and Risk) - these areas provide oversight and support the

business in identifying and managing risk and generally co-ordinate the risk management activity across the whole business. These areas provide a level of assurance as to the adequacy and operation of the risk and control environment across the Group. Where the Society does not have internal expertise or resource capacity, the Society will engage with third parties to provide second line assurance as necessary.

• Line 3 – Independent Assurance The independent assurance entities ie the Audit Committee and the internal and external audit functions - this is the ‘backstop’

line of defence and provides objective assurance that all risks have been identified and are being managed appropriately through the control framework in place, including the adequacy of the internal control system.

The Board determines the Society’s risk appetite and has a clearly defined Board Statement of Risk Appetite that contains both quantitative and qualitative measures which are integrated into decision making processes. The risk framework comprises a number of Committees, including the key committees of Board Risk and Audit. Through the Board Risk and Audit Committees, the Board receives comprehensive and timely reporting on the Society’s identification, measurement and management of risk.

The Board’s defined Statement of Risk Appetite is reviewed and adjusted at least annually and forms a key part of the Corporate Planning process. Adherence to the risk appetite is monitored by the Committees in the risk framework and reported to the Board each month against agreed measures.

The Board has undertaken a review of the adequacy and effectiveness of the risk and control framework in place throughout 2017, to effectively manage the risks relating to its strategy and business profile.

In satisfying itself that the framework of internal controls meets the requirements of the Code, the Board considered: • the annual reports received from the Chairs of Audit, Board Risk, Nominations and Remuneration Committees; • the quarterly reports received from the Audit Committee covering the work of the Compliance and internal audit functions,

the Society’s Money Laundering Reporting and Fraud Officer and the external auditors; • feedback from the annual supervisory visit from the Prudential Regulation Authority; • the monthly reports received from the Risk Committees covering the principal strategic, operational, credit, financial conduct

and regulatory risks facing the Society, together with information on the effectiveness of the controls in place to manage these risks;

• the annual audit review received on the subsidiary company; • the monthly financial reports received from the Finance Director covering balance sheet, income statement and treasury

risks; • the monthly report from the Chief Risk Officer.

The risk management framework is proportionate to the scale and complexity of the business and is commensurate with the degree of risk in the business to support decision making. It ensures the Society deploys a consistent approach to risk management in each of the principal risk areas.





More information on the principal risks faced by the Society is set out in the Board Risk Committee report on page 23. During 2017 the Society engaged additional expertise and support for credit risk analysis and prudential risk oversight to assist

the Senior Management team and the Board with the risk assessment of specific areas of development.

AUDIT COMMITTEEMembership and MeetingsThe membership and meeting information is set out in the table on page 27.

The Audit Committee membership is Non-Executive in order to maintain independence which is crucial in assessing the work of management and the assurance provided by the internal and external audit functions. The Committee invites Executive Directors together with representatives from internal and external auditors to attend the meetings and also regularly meets with the internal and external auditors and the Society’s Chief Compliance Officer without the Executive being present.

Role and ResponsibilitiesThe Committee’s key roles and responsibilities are to:• monitor the integrity of the Society’s external financial reporting, in particular reviewing significant financial reporting judgements

to ensure they are appropriate;• review the effectiveness of the Society’s internal controls;• monitor and review the activities and performance of both internal and external auditors and the Society’s Compliance function;• ensure that there are satisfactory whistleblowing arrangements to enable employees to raise any concerns about possible

improprieties and that there are effective arrangements for investigation of any such concerns.

The detailed responsibilities of the Audit Committee are set out in its Terms of Reference, which are in line with the Financial Reporting Council Guidance on Audit Committees and available on the Society’s website.

Activity in 2017The Committee considered and agreed the 2017 internal audit and compliance plans and the scope for each individual review.

In addition to regular compliance and internal audit reports which allow the Committee to monitor progress against the plans, the Committee also receives regular reports from the Society’s Money Laundering Reporting Officer in respect of suspicious account activity, potential fraudulent activity and any instances of whistleblowing or bribery.

The Committee considers the control framework and effectiveness of controls. The testing is undertaken by the compliance and internal audit teams and the scope and results of this work allows the Committee to assess the effectiveness and report to the Board.

Key Accounting JudgementsThe key areas of judgement considered by the Committee in relation to the 2017 financial statements related to the:• loan loss impairment;• income recognition – effective interest rate accounting (EIR);• hedge accounting;• final salary pension scheme valuation;• provisions for potential customer compensation.

Internal Audit Following a competitive tendering process during 2017, the Society’s internal audit function continues to be provided through an outsourced relationship with Deloitte LLP which is one of the largest financial services advisory firms in the UK. Deloitte contributes technical knowledge and industry experience when independently reviewing and reporting on the effectiveness of the internal controls Deloitte’s work helps to evaluate and improve the effectiveness of the risk management, regulatory compliance and governance frameworks. Each year the Audit Committee agrees a programme of work for the internal audit function and this provides information to the Committee on the effectiveness of the controls. The Audit Committee undertakes an annual review of the effectiveness of the internal audit function.




Compliance The Society’s Compliance function also submits an annual work plan to the Audit Committee for approval. The Chief Compliance Officer acts as the Society’s Compliance Oversight Officer and gives a regular report to the Audit Committee on regulatory issues and progress against the compliance plan. Actions arising from issues identified in compliance work are tracked through the Audit Committee. Through delivery of the compliance plan, regular reporting and issue tracking, the Compliance function provides assurance to the Board on the Society’s regulatory compliance.

External AuditThe Audit Committee reviews the independence and objectivity, qualifications and effectiveness of the external auditor on an annual basis. The Committee also concludes on whether to recommend the reappointment of the auditor to the Board.

At the start of the annual audit cycle the external auditor, KPMG LLP, presents to the Audit Committee, a detailed audit strategy, which sets out its identification and assessment of the significant risks that could affect the financial statements. KPMG LLP also provides to the Committee an assessment of other areas of focus during the audit. For the 2017 audit, significant risks identified were:• loan loss impairment;• income recognition – effective interest rate accounting (EIR).

Management investigated and responded to each of the risks identified and the Audit Committee assessed the findings. The Committee concluded that there had been appropriate challenge and mitigating action taken in relation to the findings identified. The key considerations were:• Loan loss impairment – the collective provisioning methodology remained consistent with the prior year. The key change related

to a reduction in the probability of default on the performing mortgage book which led to a decrease in the collective provision. The Committee considered the revised assumptions were appropriate based on empirical and peer group data.

• Income recognition – effective interest rate model (‘EIR’). The EIR policy remains consistent with the prior year. The EIR model has been refined in the year to more accurately spread broker fees and mortgage indemnity insurance premiums over the expected lives of products. This approach was adopted to better reflect the significant change in the volume and profile of new lending in 2017. There is no material effect on previously reported results. The effect of the change on the mortgage book held at the start of the year was to increase interest income and profit by £1.2m. Management has also undertaken an annual review of estimated product lives and the treatment of new products in the EIR model. The Committee has examined the approach taken and is satisfied that the estimates and accounting treatment adopted are appropriate.

The Committee also oversees the independence of the auditor and has an approved policy on the Society’s use of the external auditor for non-audit work. In accordance with that policy the Audit Committee will refuse permission to engage the auditor when a threat to independence and/or objectivity is perceived. Non-audit fees in 2017 amounted to £47k and represented 39% of the audit fee.

The Committee considered KPMG LLP’s performance as external auditor for 2017 and was satisfied with their objectivity and effectiveness and that they remain independent and are recommended for re-appointment at the forthcoming Annual General Meeting.

KPMG LLP or its predecessor firm has been the Society’s external auditor since 1992 and in accordance with EU legislation a change of external auditor is required no later than the 2021 year-end.

BOARD RISK COMMITTEE Membership and MeetingsThe membership and meeting information is set out in the table on page 27.

The Committee invites Executive Directors to attend the meetings and also regularly meets with other managers to discuss risk management and controls or specific risk events.





Role and ResponsibilitiesThe Committee’s key roles and responsibilities are to:• advise the Board on risk appetite, which is the amount of risk the Society is willing to take in pursuit of its strategic objectives;• regularly assess the principal risks facing the Society;• advise the Board on current risk exposure and future risk strategy;• monitor the risk profile against the prescribed risk appetite;• monitor and review the effectiveness of the risk framework to ensure that key risks are identified and appropriately managed;• ensure the Risk function is adequately resourced to perform effectively.

The detailed responsibilities of the Board Risk Committee are set out in its Terms of Reference, which are available on the Society’s website.

Activity in 2017The Board Risk Committee has continued to focus on ensuring the risk management function had the key skills necessary for second line oversight in an increasingly demanding regulatory environment.

External subject matter experts were engaged to assist in the development of credit risk analysis and management information and the complex area of prudential risk management and oversight.

The risk framework provides the Committee with ability to:• maintain oversight of the risks and effectiveness of risk management across the Society;• identify emerging risks;• promote effective challenge;• promote individual as well as collective accountabilities;• ensure the Board’s Risk Appetite is integrated in decision making;• ensure corporate objectives are achieved within risk appetite;• enable timely and effective monitoring of risk management measures and triggers.

The Risk and Compliance functions are independent from the business operations. The Chief Risk Officer is accountable to the Chair of the Board Risk Committee. A monthly report is submitted by the Chief Risk Officer to the Board to ensure the Directors have oversight of key risk issues and developments.

The Society identified the need for additional key skills and resource in the Risk and Compliance function and has recruited an additional member of the Senior Management team to undertake the role of Chief Risk Officer in addition to a Chief Compliance Officer. The successful candidate for the role of Chief Risk Officer is expected to join the Society in April 2018.

During 2017 the Board Risk Committee considered the following principle risks impacting the Society:• Financial Risks (covering capital, liquidity and funding, market, interest rate, basis and pension risks);• Credit Risk (covering residential and commercial mortgage lending and wholesale credit risk);• Operational Risk (covering cyber, data security, IT and infrastructure, management information, fraud, succession and project risks);• Conduct and Regulatory Risks (covering legal, regulatory, firm and culture risks);• Strategic Risk (covering business model and reputational risks).

The specific key considerations of the Committee during the year in relation to these risks included:• changes to the lending and treasury limits framework (in line with new regulatory guidance);• changes to improve the management information and resource available for the credit risk function;• changes to improve IT infrastructure, data security and disaster recovery model (business continuity);• changes to the fraud and anti-money laundering monitoring and reporting (in line with new regulatory guidance);• monitoring and challenge of the ‘Change Project’ outputs and proposals;• changes to the mortgage training and competence scheme and conduct risk key performance indicators;• regular reviews of the regulatory horizon and developments;• key strategic and operational risk monitoring.




Planned ActivityThe key priorities for 2018 include the continued development of management information both into and from the Committee, further development and monitoring of Risk Assurance Plans and robust challenge on risk policies.

The credit risk management information and reporting will be improved and the Society is recruiting additional permanent resource into the Credit Risk function to support the enhanced level of reporting.

A key focus for the Committee will be the induction of the new Chief Risk Officer and embedding the improved management information.

The Society has invested in a risk management software tool which will be rolled out across the business during the first quarter of 2018. The system will improve the identification of risks and measure the effectiveness of controls. The Committee will be supported by improved management information available from the new system.

Sound risk culture is a key element of effective risk management and the Board Risk Committee, through the Chief Risk Officer, will seek to continue to improve risk culture throughout the organisation in 2018.

The close monitoring of regulatory developments and requirements together with the monitoring of risk management of business process changes and the continued effectiveness of controls will be a key priority for the Committee in 2018.

NOMINATIONS COMMITTEEThe Non-Executive membership and meeting information is set out in the table on page 27. The Chief Executive is also a member of the Committee. The Group Secretary and Head of HR attend the meetings.

If the Committee were to consider any matters concerning the succession of the Chairman of the Board, the Chairman would absent himself from the meeting and the Board’s Senior Independent Director or Vice Chairman would normally take the Chair. The Chairman ensures that any individual withdraws from any Committee discussions which would give rise to a personal conflict of interest.

Role and ResponsibilitiesThe Committee’s key roles and responsibilities are:• at least annually to consider the structure, size and composition of the Board and make recommendations to the Board as

appropriate;• at least annually to review Board, Executive and Senior Management succession planning and make recommendations to the

Board as appropriate;• to review the leadership needs of the organisation and make recommendations to the Board as appropriate;• to make recommendations to the Board on the appointment and removal of Non-Executive Directors, Executive Directors,

other Executives and SMF post-holders;• to oversee the recruitment and selection process of Board appointments, Executive appointments and SMF post-holders;• to oversee the performance appraisal of Non-Executive Directors, Executive Directors and other Executives;• to oversee the allocation of Senior Management Functions and Prescribed Responsibilities;• to approve the Society’s Diversity Policy.

The detailed responsibilities of the Nominations Committee are set out in its Terms of Reference, which are available on the Society’s website.

Activity in 2017The main activities undertaken by the Nominations Committee in 2017 were:• the recruitment of a new Chief Executive. The Board was pleased to welcome Chris Harrison to the Society on 06 April 2017;• consideration and approval of a recommendation from the Chief Executive to restructure the Executive team, including the

creation of the separate posts of Chief Risk Officer, Chief Compliance Officer and (as a permanent or interim appointment) Director of Operations and Change. Approval of the appointment of Pam Mawson to the role of Chief Compliance Officer in addition to her role as Group Secretary. Oversight of the recruitment of the Chief Risk Officer;





• oversight of a review of Directors’ skills mix and, on the basis of Committee and Board consideration of the results of the review, development of a succession plan for Non-Executive appointments to the Board in 2018 to fill vacancies that will be left by the retirements of Andrew Haigh and Kim Kearney in 2018;

• consideration of the BSA’s benchmark data on building society Board composition and, in consequence, a recommendation to the Board that the normal expectation of a Non-Executive Director’s term of office on appointment should be reduced from three terms of three years to two terms of three years to bring the Society into with line with the industry trend;

• oversight of Board training in 2017 and preparation of an outline plan for Board development and training in 2018. This included review of the results of the internal Board evaluation exercise conducted at the end of 2016 and outline agreement for an external Board evaluation exercise in 2018. It was recommended to the Board (and agreed) that no internal Board evaluation would be conducted at the end of 2017 in view of the imminent external review planned for 2018;

• oversight of the annual performance appraisal of Directors including review of the training undertaken by individual Directors;• a complete redrafting of the Committee’s Terms of Reference to reflect the scope of the work conducted by the Committee

in practice and regulatory expectations of the Committee as set out in the ‘Senior Management Arrangements, Systems & Controls’ section of the Financial Conduct Authority Handbook.

Planned ActivityIn the year ahead the Committee’s priorities will be succession planning, selection of a successor to replace the current Chairman who is scheduled to retire in April 2019, an externally facilitated Board evaluation, Board development and induction and development of the two new Non-Executive Directors who are to join the Board in April 2018.

The Society recognises the benefits of diversity amongst Board members and works to ensure that as wide a range of candidates as possible is encouraged to apply for vacancies. A Statement on Board Diversity is available on the Society’s website. At 31 December 2017, the Board comprised nine Directors, including the Chairman, of which three (33%) were women. The Committee plans to set a target for diversity in 2018.

REMUNERATION COMMITTEEMembership and MeetingsThe membership and meeting information is set out in the table on page 27.

The Committee invites the Chief Executive, Chief Risk Officer and Head of HR to attend the meetings.

Role and ResponsibilitiesThe Committee’s key roles and responsibilities are:• to decide the terms, conditions and remuneration of the Society’s Chairman and the Executive Directors;• to approve the terms, conditions and remuneration of the Executive Officers on the recommendation of the Chief Executive;• to approve the terms, conditions and remuneration of the Society’s Senior Management team on the recommendation of the

Chief Executive;• to recommend to the Board the terms, conditions and remuneration of the Non-Executive Directors.

The detailed responsibilities of the Remuneration Committee are set out in its Terms of Reference, which are available on the Society’s website.

Activity in 2017During 2017 the Committee monitored the key performance indicators which formed part of the reward schemes.

The Society has adopted a remuneration policy, which describes how the Society complies with the FCA’s Remuneration Code. A report on Directors’ remuneration is provided on pages 28 to 30 giving details of the remuneration policy, remuneration levels and Directors’ service contracts.

Planned ActivityThe Committee has a calendar of items for consideration and also discusses emerging regulatory and market practices on remuneration as they arise. The Committee will consider the impact of the new regulations on Non-Executive Director time commitments.




Board and Committee Membership and AttendanceThe attendance of Directors at scheduled Board, Audit Committee, Board Risk Committee, Nominations Committee and Remuneration Committee meetings during the year is set out below:

The interim Chief Executive and interim Finance Director attended Board and Committee meetings during their tenure although the interim positions have not held the Office of Director.

* C M Harrison joined the Society on 6 April 2017 ** M J Dobson joined the Society on 30 January 2017 *** S L Pryer retired on 28 February 2017 **** A J Haigh was absent in June for his wedding.

Membership 2017Board Audit Risk Nominations Remuneration

Chairman C S Millar N J Gower A J Haigh C S Millar K S KearneyK S Kearney C S Millar N J Gower K S Kearney A J Haigh

A J Haigh P A McLelland K L Rebecchi A J Haigh K L RebecchiN J Gower M J Dobson C M Harrison

K L RebecchiP A McLellandC M HarrisonM J DobsonS J Heron

S L Pryer***

Attendance 2017Board Audit Risk Nominations Remuneration

C S Millar 11/11 6/6 4/4K S Kearney 11/11 4/4 4/4A J Haigh**** 10/11 9/10 4/4 4/4N J Gower 11/11 6/6 10/10

K L Rebecchi 11/11 10/10 4/4P A McLelland 11/11 6/6C M Harrison* 7/7 3/3M J Dobson** 10/10 9/9

S J Heron 11/11S L Pryer*** 2/2

Number of meetings held 11 6 10 4 4




Directors’ Remuneration ReportThe purpose of this report is to provide information about the Group’s policies on remuneration and how those policies have been implemented. The Remuneration Committee comprises solely of Non-Executive Directors as its key responsibility is to determine overall remuneration policy and set specific levels for Executives.

Summary of the Society’s Remuneration PolicyThe aim of the remuneration policy is to offer remuneration packages which will attract, retain and motivate performing individuals, but not to pay more than necessary to attract appropriate candidates. At all times, the Board must balance our members’ interests by spending money wisely, against developing the Society by attracting and retaining the talent it needs.

The key principles of the remuneration policy are to:• align to the Corporate Plan objectives for the growth and security of the Society;• provide a clear link to effective risk management consistent with the Society’s risk appetite;• set total remuneration at a competitive level which rewards good performance;• meet the regulatory standards and good corporate governance practices.

Executive Director RemunerationExecutive remuneration consists of basic salary, variable bonus, pension contributions and other benefits. The Committee reviews these annually on recommendation from the Chief Executive. Summaries of the 2017 Executive remuneration packages are shown on page 30.

Non-Executive Director FeesNon-Executive Directors do not have service contracts and are paid a fixed fee. There is an additional payment for the Society Chairman, Vice Chairman, Senior Independent Director and Committee Chairmen. Travel expenses are reimbursed for all travel on Society business.To attract Non-Executive Directors with the necessary skills and experience, the level of fees is benchmarked against those paid by building societies of a similar size and complexity. We also consider the time commitment required from Non-Executive Directors to be able to adequately discharge their responsibilities in a regulated business environment. In 2017, Non-Executive Director fees were increased by 2%.

Directors’ Remuneration Report VoteAlthough building societies are not required to hold an advisory vote on the Directors’ Remuneration Report, the Board considers this to be best practice and an appropriate resolution will be put to members at this year’s Annual General Meeting. In 2017, 92% (93%: 2016) of members, who voted, did so in favour of the Society’s Directors’ Remuneration Report.



Directors’ Remuneration Report continued

Summary of Executive Remuneration 2017

Element Link to Strategy

Operation Performance Measures

Minimum and Maximum Payable

Basic Salary Reflects level of accountability.Provides ability to attract and retain individuals through competitive but affordable rates of pay.

Once set, future increases are linked to personal performance and peer group benchmarking.

Personal performance against the role profile.

Individuals developing in a role may be paid below market rate until they are fully performing.Adjustments may be made if a role changes significantly or moves out of line with the market.

Bonus Linked to the delivery of annual business plan targets including strategic objectives and personal objectives.

Challenging, but achievable objectives are aligned with the Corporate Plan.The Chief Risk Officer provides assurance that the scheme design does not incentivise inappropriate behaviours.

Corporate measures for 2017 are:• profit• mortgage asset

growth• average mortgage

margin.Personal objectives are set by the Chief Executive and agreed by the Remuneration Committee.

There is no payout if less than 90% of target is met. The payout for on-target performance is of 20% of basic salary. The maximum payment is 40% for overperformance. Payment of 50% of the award is deferred for three years. Deferred bonus payments may be withdrawn in the following circumstances:• employee misbehavior or

material error• poor performance

leading to regulatory consequences

• failure to manage credit risks causing the Society to become unprofitable.

Pension Provides market competitive remuneration.

Pension contributions are on membership of the Society’s Defined Contribution scheme.Cash equivalent may be offered if requested.

Not applicable. Matched contributions up to 10% of basic salary.

Benefits To align Executive total remuneration broadly with the market.

The principle benefits are:• life assurance• private medical

insurance• company car allowance• 6 months’ notice period• other benefits eg

relocation assistance may be provided based on individual circumstances.

Not applicable.




Directors’ Remuneration Report continued

Executive Directors2017 Salary Bonus Taxable

BenefitsSub Total Increase

in Accrued Pension

Increase in

Accrued Pension

cash lump sum

Defined Contribution

Scheme

TOTAL

£ £ £ £ £ £ £ £C M Harrison1 149,231 44,769 15,222 209,222 0 0 0 209,222M J Dobson2 145,319 43,596 9,062 197,977 0 0 8,958 206,935S L Pryer3 18,749 0 1,608 20,357 0 0 2,250 22,607S J Heron 90,000 27,000 5,513 122,513 226 1,021 10,800 134,560Total 403,299 115,365 31,405 550,069 226 1,021 22,008 573,3242016 Salary Bonus Taxable

BenefitsSub Total Increase

in Accrued Pension

Increase in

Accrued Pension

cash lump sum

Defined Contribution

Scheme

TOTAL

£ £ £ £ £ £ £ £N A Quinton4 36,773 0 1,142 37,915 0 0 3,652 41,567S L Pryer 112,500 0 9,662 122,162 2,085 10,492 2,747 137,486S J Heron 82,058 8,206 4,508 94,772 1,387 6,265 2,059 104,483Total 231,331 8,206 15,312 254,849 3,472 16,757 8,458 283,536

Non-Executive Directors

2017 2017 2016£ £

C S Millar 45,572 43,058A T F Hunter5 0 6,531K S Kearney 30,273 28,592A J Haigh 30,833 26,993N J Gower 29,873 26,630K L Rebecchi6 25,136 18,689P A McLelland7 25,172 2,409TOTAL 186,859 152,902

Steven Pryer retired from the Society on 31 May 2017 and stood down from the Board on 28 February 2017. Under the terms of his settlement agreement the Society paid Steve a sum of £143,000.

2017 Non-Executive Directors’ fees include travel expenses paid.

Payment of 50% of 2017 bonus amounts are deferred for three years.

1 Appointed 06.04.17 2 Appointed 30.01.17 3 Resigned 28.02.17 4 Resigned 24.03.16

5 Resigned 24.03.16 6 Appointed 03.03.16 7 Appointed 23.11.16

K L Rebecchi Chairman of the Remuneration Committee 7 March 2018



Independent auditors’ report to the members of Furness Building Society1. Our opinion is unmodifiedWe have audited the Group and Society annual accounts of Furness Building Society for the year ended 31 December 2017, comprising of: the Group and Society statement of comprehensive income, statement of changes in equity, statement of financial position, group cash flow statement, and the related notes, including the accounting policies in note 1.

In our opinion the annual accounts:• give a true and fair view of the state of affairs of the Group and the Society as at 31 December 2017 and of the income and

expenditure of the Group and of the Society for the year then ended; • have been properly prepared in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard

applicable in the UK and Republic of Ireland; and• have been prepared in accordance with the requirements of the Building Societies Act 1986 and regulations made under it.

Basis for opinion:We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the Audit Committee. We were appointed as auditor by the members during 1992. The period of total uninterrupted engagement is for the 26 financial years ended 31 December 2017.

We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard applicable to public interest entities. No non-audit services prohibited by that standard were provided.

2. Key audit matters: our assessment of risks of material misstatementKey audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.

Overview

Materiality: group financial statements as a whole

£135,000 (2016: £150,000)4.3% (2016: 8.8%) of Group profit before tax from continuing operations

Coverage 3.3% (2016: 13.6%) of Group profit before tax

Risks of material misstatement vs 2016

Recurring risks Impairment of loans

Effective interest rate income recognition




Key audit matter The risk Our response

Impairment of loans (Group impairment provision £1,147,000 (2016: £1,507,000) and Society impairment provision £1,127,000 (2016: £1,487,000))Refer to page 22 (Audit Committee Report), page 42 (accounting policy) and page 44 (financial disclosures).

Subjective estimate: Impairments cover loans specifically identified as impaired and a collective impairment of all other loans for those impairments incurred but not yet specifically identified. The Directors judge individual impairments by reference to loans that have been repossessed or are in arrears by three or more months.The collective impairment is derived from a model that uses a combination of the Group’s and Society’s historical experience and, due to the Group’s and Society’s limited loss experience, the professional judgement of the directors. In particular, judgement is required in respect of the probability of default and forced sale discounts against collateral. The impairment model is most sensitive to movements in the probability of default assumption.

Our procedures included:• Benchmarking assumptions: We compared the key

assumptions used in the model for probability of default and forced sale discounts with externally available data, including KPMG’s building society database. We compared the loan portfolio key metrics, including arrears trends and provision coverage with those of comparable lenders.

• Our sector experience: We challenged the key impairment assumptions used in the model for probability of default and forced sale discounts using our knowledge of recent impairment experience in this industry.

• Sensitivity analysis: We assessed the collective model and specific individual impairments for their sensitivities to changes in the key assumptions, by performing stress testing to help us assess the reasonableness of the assumptions and identify areas of potential additional focus.

• Assessing transparency: Assessing the adequacy of the Group’s and Society’s disclosures about the degree of estimation involved in arriving at the provision.

Our results We found the resulting estimate of the impairment provision to be acceptable (2016: acceptable).

Key audit matter The risk Our response

Effective interest rate income recognition (Group and Society EIR income £1,648,000 (2016: £264,000); year end EIR asset £1,426,000 (2016: £222,000 liability))Refer to page 22 (Audit Committee Report), page 39 (accounting policy) and page 44 (financial disclosures).

Subjective estimate: Using an Excel model, interest earned, fees earned and incurred on loans are recognised using the effective interest rate (‘EIR’) method that spreads directly attributable cash flows over the expected lives of the loans. The Directors apply judgement in deciding and assessing the expected repayment profiles used to determine the EIR. The most critical element of judgement in this area is the estimation of the future redemption profiles of the loans. This is informed by product mix and past customer behaviour of when loans are repaid. Accounting application: Transaction costs are required to be spread over the expected life. Given that transaction costs are often one off costs, usually occurring either at the start or at the end of the contract, it is not uncommon for these to be overlooked when constructing EIR models.

Our procedures included:• Methodology implementation: We compared the

application of the EIR methodology and the cash flows included in the model with the relevant accounting standard, checking that the model included the appropriate level of any transaction costs.

• Our sector experience: We assessed the key assumptions behind the expected customer lives and profiles of significant loan products against our own knowledge of industry experience and trends, including benchmarking with comparable lenders.

• Sensitivity analysis: We assessed the models for their sensitivities to changes in the key assumptions by considering different profiles to help us assess the reasonableness of the assumptions used and identify areas of potential additional focus.

• Historical comparison: We assessed the reasonableness of the model’s expected repayment profiles assumptions against historical experience of loan lives based on customer behaviour, product mix and recent performance.

• Assessing transparency: We assessed the adequacy of the Group’s and Society’s disclosures about the degree of estimation involved in arriving at the interest income recognised.

Our results We found the resulting estimate of the EIR to be acceptable (2016: acceptable) and the accounting treatment of transaction costs to be acceptable (2016: acceptable).



3. Our application of materiality and an overview of the scope of our auditMateriality for the Group financial statements as a whole was set at £135,000 (2016: £150,000), determined with reference to a benchmark of Group profit before tax from continuing operations (of which it represents 4.3% (2016: 8.8%)).Materiality for the Society financial statements as a whole was set at £130,000 (2016: £135,000), determined with reference to a benchmark of profit before tax from continuing operations, of which it represents 4.6% (2016: 8.8%).We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £6,750 (2016: £7,500), in addition to other identified misstatements that warranted reporting on qualitative grounds.The Group team performed the audit of the Group as if it was a single aggregated set of financial information. The audit of the Group and Society was performed using the materiality levels set out above.

4. We have nothing to report on going concernWe are required to report to you, if we have concluded that the use of the going concern basis of accounting is inappropriate, or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis, for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in these respects.

5. We have nothing to report on the other information in the Annual ReportThe Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.

Annual Business Statement and Directors’ Report In our opinion:• the Annual Business Statement and the Directors’ Report have each been prepared in accordance with the applicable requirements

of the Building Societies Act 1986 and regulations thereunder; • the information given in the Directors’ Report for the financial year is consistent with the accounting records and the annual accounts;

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.

Group profit before tax from continuing operationsMateriality

Group profit before tax from continuing operations

£3,108,000 (2016: £1,824,000)

Group Materiality £135,000 (2016: £150,000)

£135,000 Whole financial statements materiality (2016: £150,000)

£6,750 Misstatements reported to the Audit Committee (2016: £7,500)




6. We have nothing to report on the other matters on which we are required to report by exception Under the Building Societies Act 1986 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the Society; or• the annual accounts 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 these respects.

7. Respective responsibilities Directors’ responsibilitiesAs explained more fully in their statement set out on page 14, the Directors are responsible for: the preparation of annual accounts which give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Society’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Society or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.

Irregularities – ability to detectOur audit aimed to detect non-compliance with relevant laws and regulations (irregularities) that could have a material effect on the annual accounts. We identified relevant areas of laws and regulations from our sector experience, through discussion with the Directors and other management (as required by auditing standards), and from inspection of the Group’s regulatory and legal correspondence.We had regard to laws and regulations in areas that directly affect the financial statements including financial reporting (including related building society legislation) and taxation legislation. We considered the extent of compliance with those laws and regulations as part of our procedures on the related annual accounts items.In addition we considered the impact of laws and regulations in the specific areas of regulatory capital and liquidity, conduct including PPI mis-selling, money laundering and certain aspects of building society legislation recognising the financial and regulated nature of the Group’s activities. With the exception of any known or possible non-compliance, and as required by auditing standards, our work in respect of these was limited to enquiry of the Directors and other management and inspection of regulatory and legal correspondence. We considered the effect of any known or possible non-compliance in these areas as part of our procedures on the related annual accounts items.We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit.As with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.

8. The purpose of our audit work and to whom we owe our responsibilities 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 and the Society’s members as a body, for our audit work, for this report, or for the opinions we have formed.

David Allen (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 1 Sovereign Square Sovereign Street Leeds LS1 4DA 7 March 2018



STATEMENT OF COMPREHENSIVE INCOMEFor the year ended 31 December 2017

OTHER COMPREHENSIVE INCOME

Notes

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Interest receivable and similar income 2 22,377 22,219 22,232 22,079 Interest payable and similar charges 3 (6,658) (6,658) (8,586) (8,586)Net interest income 15,719 15,561 13,646 13,493

Fees and commissions receivable 4 341 190 407 269 Fees and commissions payable (630) (630) (598) (598)Other operating income/(charge) 322 322 (179) (215)Net gain/(loss) from other financial instruments at fair value through profit and loss 5 60 60 (50) (50)

Total net income 15,812 15,503 13,226 12,899

Administrative expenses 6 (10,255) (10,208) (11,338) (11,237)Depreciation and amortisation 17/18 (1,605) (1,605) (886) (886)Operating profit before impairment losses and provisions 3,952 3,690 1,002 776

Provisions for liabilities 26 (120) (120) (168) (168)Impairment credit on loans and advances 15 282 282 265 265 Profit before tax 4,114 3,852 1,099 873

Tax (expense)/credit 9 (898) (844) (2) 43

Profit for the financial year 3,216 3,008 1,097 916

Notes

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Profit for the financial year 3,216 3,008 1,097 916

Changes in fair value of debt securities and Treasury Bills - realised gains transferred to profit and loss - - (50) (50) - valuation (losses)/gains taken to equity (12) (12) 108 108 Actuarial gain/(loss) recognised in the pension scheme 31 833 833 (1,589) (1,589)

Taxation on other comprehensive income 9 (140) (140) 103 103

Total comprehensive income/(loss) for the year 3,897 3,689 (331) (512)




GROUP STATEMENT OF CHANGES IN EQUITY

Group

Notes

General reserves

£000

Available-for-sale reserves

£000

Total £000

Balance as at 1 January 2016 63,138 4 63,142 Profit for the year 1,097 - 1,097 Other comprehensive income for the year:Actuarial (loss) recognised in the pension scheme 31 (1,589) - (1,589)Movement in deferred tax relating to the pension scheme 103 - 103

Changes in fair value of debt securities Recycled to profit and loss - (50) (50) Taken through other comprehensive income - 108 108 Other comprehensive income for the year (1,486) 58 (1,428)

Balance as at 31 December 2016 62,749 62 62,811

Balance as at 1 January 2017 62,749 62 62,811 Profit for the year 3,216 - 3,216 Other comprehensive income for the year:Actuarial gain recognised in the pension scheme 31 833 - 833 Movement in deferred tax relating to the pension scheme (140) - (140)

Changes in fair value of debt securities Recycled to profit and loss - - - Taken through other comprehensive income - (12) (12)Other comprehensive income for the year 693 (12) 681


Society

Notes

General reserves

£000

Available-for-sale reserves

£000

Total £000

Balance as at 1 January 2016 61,533 4 61,537 Profit for the year 916 - 916 Other comprehensive income for the year:Actuarial (loss) recognised in the pension scheme 31 (1,589) - (1,589)Movement in deferred tax relating to the pension scheme 103 - 103

Changes in fair value of debt securities Recycled to profit and loss - (50) (50) Taken through other comprehensive income - 108 108 Other comprehensive income for the year (1,486) 58 (1,428)


Balance as at 1 January 2017 60,963 62 61,025 Profit for the year 3,008 - 3,008 Other comprehensive income for the year:Actuarial gain recognised in the pension scheme 31 833 - 833 Movement in deferred tax relating to the pension scheme (140) - (140)

Changes in fair value of debt securities Recycled to profit and loss - - - Taken through other comprehensive income - (12) (12)Other comprehensive income for the year 693 (12) 681




STATEMENT OF FINANCIAL POSITION

At 31 December 2017

Notes

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

AssetsLiquid assets Cash in hand and balances with Bank of England 11 96,713 96,713 72,590 72,590 Treasury Bills and similar securities 10 4,021 4,021 14,131 14,131 Loans and advances to credit institutions 11 13,459 13,204 10,409 10,158 Debt securities 12 15,576 15,576 16,546 16,546 Derivative financial instrument assets 13 682 682 94 94 Loans and advances to customers Loans fully secured on residential property 14 757,204 752,939 689,129 684,579 Loans fully secured on land 14 6,477 6,477 7,160 7,160 Investments in subsidiary undertakings 16 - 2,561 - 2,964 Other assets 19 2,168 2,064 1,840 1,822 Tangible fixed assets 18 938 938 1,927 1,927 Intangible fixed assets 17 1,009 1,009 1,581 1,581 Prepayments and accrued income 20 502 502 605 605

Total assets 898,749 896,686 816,012 814,157

LiabilitiesShares 21 682,654 682,654 678,552 678,552 Amounts owed to credit institutions 22 14,044 14,044 3,011 3,011 Amounts owed to other customers 23 122,237 122,237 57,137 57,137 Derivative financial instrument liabilities 13 934 934 1,870 1,870 Other liabilities 24 1,051 1,005 494 440 Accruals and deferred income 25 1,444 1,421 759 744 Provisions for liabilities 26 377 377 730 730 Retirement benefit obligations 31 4,314 4,314 5,662 5,662 Subordinated liabilities 28 4,986 4,986 4,986 4,986

Total liabilities 832,041 831,972 753,201 753,132

ReservesGeneral reserves 66,658 64,664 62,749 60,963 Available-for-sale reserves 50 50 62 62 Total reserves attributable to members of the Society 66,708 64,714 62,811 61,025

Total reserves and liabilities 898,749 896,686 816,012 814,157

The notes on pages 39 to 68 form an integral part of these accounts. The accounts were approved by the Board of Directors on 7 March 2018 and were signed on its behalf by:C S Millar K L Rebecchi C M Harrison Chairman Vice Chairman Chief Executive




GROUP CASH FLOW STATEMENT

Notes

Group 2017 £000

Group 2016 £000

Cash flows from operating activitiesProfit before tax 4,114 1,099 Adjustments for Depreciation and amortisation 1,605 886 Loss on disposal of tangible fixed assets 93 - Interest on subordinated debt 309 297 Net loss on disposal of debt securities and Treasury Bills (12) - (Decrease) in impairment of loans and advances (282) (265)Total 5,827 2,017

Changes in operating assets and liabilities (Increase) in prepayments, accrued income and other assets (868) (2,816) Increase/(decrease) in accruals, deferred income and other liabilities 339 (209) (Increase) in loans and advances to customers (68,634) (7,946) Increase/(decrease) in shares 4,522 (27,023) Increase/(decrease) in amounts owed to other credit institutions and other customers 76,089 (39,791) Decrease/(increase) in loans and advances to credit institutions 665 (1,241) (Decrease) in retirement benefit obligation (516) (397) Taxation paid (209) (2)Net cash generated by/(used in) operating activities 11,388 (79,425)

Cash flows from investing activities Purchase of debt securities (13,484) (18,000) Disposal of debt securities 24,552 37,689 Purchase of tangible fixed assets (91) (147) Disposal of tangible fixed assets 5 - Purchase of intangible assets (51) (370)Net cash generated by investing activities 10,931 19,172

Interest paid on subordinated debt (309) (297)

Net increase/(decrease) in cash and cash equivalents 27,837 (58,533)

Cash and cash equivalents at 1 January 79,153 137,686

Cash and cash equivalents at 31 December 11 106,990 79,153



Notes to the Accounts1. PRINCIPAL ACCOUNTING POLICIES

1.1 General information Furness Building Society is incorporated in the United Kingdom under the Building Societies Act 1986. The address of its registered office is 51-55 Duke Street, Barrow-in-Furness, Cumbria LA14 1RT.The principal accounting policies adopted in the preparation of these financial statements are set out below.

1.2 Basis of preparation The financial statements have been prepared in accordance with Financial Reporting Standard 102, ‘The Financial Reporting Standard applicable in the UK and Northern Ireland’ (FRS 102), and in accordance with the Building Societies Act 1986 and the Building Societies (Accounts and Related Provisions) Regulations 1998. The Society has also chosen to apply the recognition and measurement provisions of IAS 39, ‘Financial Instruments: Recognition and Measurement’ (as adopted for use in the EU).

The parent Society is included in the consolidated financial statements, and is considered to be a qualifying entity under FRS 102 paragraphs 1.8 to 1.12. The following exemptions available under FRS 102 in respect of certain disclosures for the parent Society financial statements have been applied: • No separate parent Society Cash Flow Statement with related notes is included; and • Key Management Personnel compensation has not been included a second time.

The financial statements have been prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments and financial instruments classified at fair value through the profit or loss (‘FVTPL’) or available-for-sale.

The financial statements have been prepared on a going concern basis as set out in the Directors’ Report on page 8.

As with many other financial institutions, the Group looks to meet its day-to-day liquidity requirements through prudent management of its retail and wholesale funding sources. Furthermore the Group’s forecasts and plans, taking account of current and possible future operating conditions, including stress tests and scenario analysis, indicate that the Group has sufficient operating liquidity and capital for the foreseeable future.

As such, the Directors are satisfied that the Group has adequate resources to continue in business and to use the going concern basis in preparing the financial statements.

1.3 Basis of consolidationThe accounting policies below and the Statement of Comprehensive Income and Statement of Financial Position incorporate the Society and its subsidiary undertakings all of which have year ends of 31 December. Uniform accounting policies are used throughout the Group and are consistent with the prior year. Investments in subsidiary undertakings are stated at cost less any provision for impairment.

1.4 InterestInterest income and expense are recognised in profit or loss using the effective interest rate (EIR) method. The EIR is the rate that discounts the estimated future cash payments and receipts through the expected life of the financial asset or financial liability to the carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. The calculation of the effective interest rate includes transaction costs and fees that are an integral part of the effective interest rateTransaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability.The EIR model has been refined in the year to more accurately spread broker fees and mortgage indemnity insurance premiums over the expected lives of products. This approach was adopted to better reflect the significant change in the volume and profile of new lending in 2017. The change on the mortgage book held at the start of the year was to increase interest income and profit by £1.2m.

1.5 Fees and commissionFees and commission income and expense that are integral to the effective interest rate on a financial asset or financial liability are included in the measurement of the effective interest rate (see 1.4).

Fees receivable are recognised on the accruals basis when all contractual obligations have been fulfilled.

Other fees payable are recognised on an accruals basis when the service has been provided or on the completion of an act to which the fee relates, and are inclusive of VAT where applicable.




Notes to the Accounts continued

1.6 Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the Statement of Comprehensive Income except to the extent that it relates to items recognised directly in equity or other comprehensive income, in which case it is recognised directly in equity or other comprehensive income. Current taxation Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or

substantively enacted at the Statement of Financial Position date, and any adjustment to tax payable in respect of previous years. Corporation tax is charged on the profit on ordinary activities for the year as adjusted for taxation purposes.

Deferred taxation Provision for deferred tax is made on a non-discounted basis in respect of all timing differences that have originated but not

reversed by the Statement of Financial Position date (see note 27). Timing differences represent differences between gains and losses recognised for tax purposes in periods different from those in which they are recognised in financial statements. No deferred tax is recognised on permanent differences between the Group’s taxable gains and losses and its results as stated in the financial statements. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Deferred tax is measured at the tax rate that is expected to apply to the reversal of the related difference, using tax rates enacted or substantively enacted at the Statement of Financial Position date. For non-depreciable assets that are measured using the revaluation model, or investment property that is measured at fair value, deferred tax is provided at the rates and allowances applicable to the sale of the asset.

Unrelieved tax losses and other deferred tax assets are recognised only to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits.

1.7 Financial assetsAt initial recognition the Group classifies non-derivative financial assets either as loans and receivables or as available-for-sale assets. No assets have been classified as held to maturity. a) Loans and receivables ‘Loans and receivables’ are non-derivative financial assets with fixed or determinable payments that are not quoted in an

active market and that the Group does not intend to sell immediately or in the near term. Loans and receivables are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest rate method. The Group’s loans and advances to credit institutions and customers are classified as loans and receivables.

b) Available-for-sale financial assets ‘Available-for-sale’ investments are non-derivative investments that are designated as available-for-sale or are not classified

as another category of financial assets. Available-for-sale investments comprise Treasury Bills, gilts and debt securities. All available-for-sale investments are measured at fair value after initial recognition.

Interest income is recognised in profit or loss using the effective interest rate method. Dividend income is recognised in profit or loss when the Group becomes entitled to the dividend. Impairment losses are recognised in profit or loss.

c) Financial assets at fair value through profit or loss The Group uses derivative financial instruments only for risk management purposes, and not for trading purposes. Derivatives

are recognised at fair value in the Statement of Financial Position with the gain or loss on remeasurement recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.




The Group designates derivatives held for risk management purposes as hedging instruments in qualifying hedging relationships. On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument and hedged items, including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at inception of the hedge relationship and on an ongoing basis, of whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80–125%.These hedging relationships are discussed in d) below. d) Fair Value Hedges

Where a derivative financial instrument is designated as a hedge of the variability in fair value of a recognised asset or liability or an unrecognised firm commitment, all changes in the fair value of the derivative are recognised immediately in profit or loss. The carrying value of the hedged item is adjusted by the change in fair value that is attributable to the risk being hedged (even if it is normally carried at cost or amortised cost) and any gains or losses on remeasurement are recognised immediately in the Statement of Comprehensive Income (even if those gains would normally be recognised directly in reserves). If hedge accounting is discontinued and the hedged financial asset or liability has not been derecognised, any adjustments to the carrying amount of the hedged item are amortised into profit or loss using the effective interest method over the remaining life of the previously hedged item.

The Group and Society enters into credit support agreements, which protect against counterparty default in respect of hedging instruments by means of collateral transactions. Collateral balances are included within ‘liquid assets’ or ‘amounts owed to credit institutions’ as appropriate and interest receivable or payable reflected in the statement of comprehensive income within ‘net interest receivable’.

1.8 Funding for Lending SchemeLoans and advances over which the Group transfers its rights to the collateral thereon to the Bank of England under the FLS are not derecognised from the statement of financial position, as the Group retains substantially all the risks and rewards of ownership, including all cash flows arising from the loans and advances and exposure to credit risk. The Treasury Bills that the Group borrows against the transferred assets are not recognised in the Statement of Financial Position, but where they are sold to third parties by the Group under agreements to repurchase, the cash received is recognised as an asset within the Statement of Financial Position together with the corresponding obligation to return it which is recognised as a liability at amortised cost within ‘Amounts owed to credit institutions’. Interest is accrued over the life of the agreement on an EIR basis. 1.9 Financial liabilitiesAll financial liabilities are measured at amortised cost using the effective interest rate method, except for those financial liabilities measured at fair value through income and expenditure.

1.10 Derecognition of financial assets and liabilitiesThe Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in Other Comprehensive Income is recognised in profit and loss. Financial liabilities are derecognised when the liability is extinguished, that is when the contractual obligation is discharged, cancelled or expires.





1.11 Impairment of financial assets a) Assets carried at amortised cost Individual assessments are made of all loans and advances against properties which are in possession, or in arrears by three

months or more, or are subject to forbearance activities or other significant cases of concern. Individual impairment allowances are made against those loans and advances where there is objective evidence of impairment, which may include:

• significant financial difficulty of the borrower/issuer; • deterioration in payment status; • renegotiation of the terms of an asset due to financial difficulty of the borrower or issuer, including granting a concession/

forbearance to the borrower or issuer; • becoming probable that the borrower or issuer will enter bankruptcy or other financial reorganisation; and • any other information discovered during regular review suggesting that a loss is likely in the short to medium term.

If there is objective evidence of impairment, the amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. In considering expected future cash flows, account is taken of any discount which may be needed against the value of the property at the Statement of Financial Position date thought necessary to achieve a sale and anticipated realisation costs.

In addition the Group assesses quarterly whether there is objective evidence to suggest a financial asset or group of financial assets is likely to be impaired. Where a collective assessment is made, each category or class of financial asset is split into groups of assets with similar credit risk characteristics. The Group measures the amount of impairment loss by applying estimated loss factors based on the Group’s experience of default, loss emergence periods, the effect of movements in house prices and any adjustment for the expected forced sales value.

Where certain emerging impairment characteristics are considered significant but not assessed as part of the impairment calculation, Management may elect to apply an overlay to the impairment allowance. The amount of impairment loss is recognised immediately through the income statement and a corresponding reduction in the value of the financial asset is recognised.

b) Available-for-sale assets The Group assesses at each Statement of Financial Position date whether there is objective evidence that an available-for-sale

asset or group of available-for-sale assets is impaired.

Available-for-sale assets are impaired and impairment losses incurred if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event has an impact on the estimated future cash flows of those assets. Loss events may include default of a counterparty or disappearance of an active market for the assets. Impairment is measured as the difference between the current amortised cost and the current fair value, less any impairment loss on that asset previously recognised.

1.12 Offsetting Financial assets and liabilities are offset and the net amounts presented in the financial statements when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously. 1.13 Cash and cash equivalentsCash and cash equivalents includes cash in hand and balances with the Bank of England plus loans and advances to credit institutions with an original maturity of less than 3 months. Cash pledged with credit institutions as collateral in respect of derivative contracts is not included in these balances. 1.14 Tangible fixed assetsTangible fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to working condition for its intended use.The Group capitalises the cost of additions and major alterations to office premises and equipment. In the case of freehold and leasehold premises with a term remaining in excess of 50 years, depreciation of the original cost of these is charged to the Statement of Comprehensive Income over the lower of 50 years and their estimated useful life.




The cost of other fixed assets is written off on a straight line basis over the estimated useful lives as follows: • Equipment, fixtures, fittings and vehicles are written off over periods between 2 and 10 years or their estimated useful life if

lower. • Leasehold premises with less than 50 years unexpired are written off over the unexpired period of the lease.The assets’ residual values and useful lives are reviewed and adjusted, if appropriate, at the end of each reporting period. The effect of any change in useful life is accounted for prospectively.Tangible assets are derecognised on disposal or when no future economic benefits are expected. On disposal, the difference between the net disposal proceeds and the carrying amount is recognised in the Statement of Comprehensive Income and included in ‘Other Operating Losses’. 1.15 Intangible assetsPurchased software and costs directly associated with the development of computer software are capitalised as intangible assets where the software is an identifiable asset controlled by the Group which will generate future economic benefits and where costs can be reliably measured. Costs incurred to establish technological feasibility or to maintain existing levels of performance are recognised as an expense as incurred. Intangible assets are stated at cost less accumulated amortisation and accumulated impairment losses. Amortisation is calculated, using the straight-line method, to allocate the depreciable amount of the assets to their residual values over the estimated useful lives of the software, which are between 3 and 5 years.Amortisation is charged to administrative expenses in the Statement of Comprehensive Income. Where factors, such as technological advancement or changes in market price, indicate that residual value or useful life have changed, the residual value, useful life or amortisation rate are amended prospectively to reflect the new circumstances. The assets are reviewed for impairment if the above factors indicate that the carrying amount may be impaired.Costs associated with maintaining computer software are recognised as an expense as incurred. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.

1.16 Leasing All payments under operating lease contracts are charged to the Statement of Comprehensive Income on a straight line basis over the life of the lease. 1.17 Liquid assetsDebt securities are initially measured at fair value, which is normally the transaction price to the Society, adjusted to exclude interest accrued at the date of purchase. Such assets are subsequently carried at fair value and the changes in fair value are recognised through the available-for-sale reserve. Provision is made for any potential impairment in value if necessary. Where there is a permanent impairment of a liquid asset, a provision is made so as to write down the cost of the security to its recoverable amount. Other liquid assets are stated at the lower of the cost and net realisable value.

1.18 Employee benefitsThe Group and Society provides a range of benefits to employees, including paid holiday arrangements and defined benefit and defined contribution pension plans. a) Short term benefits Short term benefits, including holiday pay and other similar non-monetary benefits, are recognised as an expense in the period

in which the service is received. b) Pension costs i. Defined Benefit Plan The Group operates a defined benefit pension scheme and the assets are held in a separate trustee administered fund.

Included within the Statement of Comprehensive Income is the Group’s net obligation calculated as the present value of the defined benefit obligation less the fair value of plan assets less any unrecognised past service costs. Any remeasurements that arise are recognised immediately in other comprehensive income through the Statement of Comprehensive Income.





The finance cost is recognised within finance income and expense in other comprehensive income. The finance cost is the increase in the defined benefit obligation which arises because the benefits are one period closer to settlement. Contributions are transferred to the trustee administered fund on a regular basis to secure the benefits provided under the rules of the scheme. Pension costs are assessed in accordance with the advice of a professionally qualified actuary.

ii. Defined Contribution Scheme The Group also operates a contributory defined contribution pension scheme, the assets of which are held separately from

those of the Group. For this scheme the cost is charged to the income statement as contributions become due. The amount charged to the Statement of Comprehensive Income represents the contributions payable to the scheme in respect of the accounting period.

1.19 Provisions A provision is recognised in the Statement of Financial Position when the entity has a present legal or constructive obligation as a result of a past event, that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are recognised at the best estimate of the amount required to settle the obligation at the reporting date.

1.20 Dividends On occasions the Society’s wholly owned subsidiaries may make dividend payments to their parent. Such dividends are decided at the discretion of the subsidiaries’ Boards of Directors and are reflected in the Annual Report and Accounts of the respective entities when this occurs. Dividends are only recognised when approved and paid.

1.21 Critical judgements and estimates in applying the accounting policyThe Group makes estimates and judgements that affect the reported amounts of assets and liabilities. These are regularly evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. These are described below: a) Impairment losses on loans and advances to customers

The Group reviews its mortgage advances portfolio at least on a quarterly basis to assess impairment. In determining whether an impairment loss should be recorded, the Group is required to exercise a degree of judgement. Impairment allowances are calculated using historical arrears experience, modelled credit risk characteristics and expected cash flows. Estimates are applied to determine prevailing market conditions (eg interest rates and house prices), customer behaviour (eg default rates) and the length of time expected to complete the sale of properties in possession. The accuracy of the allowances would therefore be affected by unexpected changes to these assumptions.

The key assumption is the expected level of defaults in each category of impairment – the propensities for default. The Group has calculated these default rates from its experience over recent years. During that period the Group has had a low number of possessions, and in addition the default rates may have been depressed by the Group’s forbearance policy. As a result Management has applied an uplift to the actual default rates experienced in its collective impairment assumptions for the lowest arrears categories.

The collective provisioning methodology remained consistent with the prior year. The key change in assumptions in 2017 related to a 1 percentage point reduction in the probability of default on the performing mortgage book which led to a £0.36m decrease in the collective provision at the point the change was made.

b) Effective Interest Rate (EIR) The calculation of an Effective Interest Rate (EIR) requires the Society to undertake an assessment of the expected lives of

mortgages and mortgage fees to be spread over the lives of products. The EIR policy remains consistent with the prior year. i) Expected Mortgage Lives In determining the expected lives of mortgage assets, the Group uses historical and forecast redemption data as well as

Management judgement. The expected lives of mortgage assets are periodically reassessed for reasonableness as any variation in the expected lives will change the EIR carrying value in the Statement of Financial Position and the timing of the recognition of interest income.

The expected lives of mortgage assets have been estimated as being the life of the initial period of the loan, this typically being the fixed or discounted rate period, plus two months.




ii) Mortgage Fees The EIR model has been refined in the year to more accurately spread broker fees and mortgage indemnity insurance

premiums over the expected lives of products. This approach was adopted to better reflect the significant change in the volume and profile of new lending in 2017. The effect of the change on the mortgage book held at the start of the year was to increase interest income and profit by £1.2m.

c) Employee benefits The Group operates a defined benefit pension scheme. Significant judgements have to be exercised in estimating the value of

the assets and liabilities of the scheme, and hence of its net deficit. The assumptions are outlined in Note 31 to the Accounts. Of these assumptions, the key impact on the net liability is the discount rate. d) Fair value of derivatives and financial assets The Group employs the following techniques in determining the fair value of its derivatives and financial assets: • Available-for-sale – measured at fair value using market prices or, where markets have become inactive or there is no

readily available traded price, the present value of estimated future cash flows is used. • Derivative financial instruments – calculated by discounted cash flow models using yield curves that are based on

observable market data. The key judgement in this area is around selecting the most appropriate yield curve for use in the calculation of derivative

financial instruments.

1.22 Country by Country information The Group operates entirely in the UK and so no Country by Country information has been presented. Information for the years ended 31 December 2016 and 31 December 2017 has been prepared on the following basis: • The number of employees has been calculated as the average number of full and part-time employees, on a monthly basis, as

disclosed in note 7. • Turnover represents total operating income as disclosed in the Group Income Statement. Total operating income comprises net

interest, fees and commissions receivable and other operating income. • Pre-tax profit or loss represents the Group profit or loss before tax, as reported in the Group Income Statement. • Corporation tax paid represents the cash amount of corporate income tax paid during the year, as disclosed in the Group Cash

Flow Statement.




2. INTEREST RECEIVABLE AND SIMILAR INCOME

3. INTEREST PAYABLE AND SIMILAR CHARGES

4. FEES AND COMMISSIONS RECEIVABLE

5. NET GAIN/(LOSS) FROM OTHER FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT AND LOSS

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

On loans fully secured on residential property 22,886 22,706 22,171 21,982On other loans: Fully secured on land 313 313 368 368 To subsidiary undertakings - 22 - 36 On debt securities: Interest and other income 88 88 118 118 (Loss) on disposal - - (13) (13)On Treasury Bills and similar income Interest and other income 50 50 101 101 Profit on disposal - - 62 62 On other liquid assets: Interest and other income 257 257 495 495 Net expense on financial instruments (1,217) (1,217) (1,070) (1,070)

22,377 22,219 22,232 22,079

Interest on loans fully secured on residential property and on other loans includes £22k (£26k: 2016) in respect of interest income accrued on non-performing loans.

On shares held by individuals 5,410 5,410 7,398 7,398On other shares 2 2 3 3On subordinated liabilities 309 309 297 297On deposits and other borrowings 937 937 888 888

6,658 6,658 8,586 8,586

Derivatives in designated fair value hedge relationships 1,493 1,493 (183) (183)Adjustments to hedged items in fair value hedge accounting relationships (1,468) (1,468) 190 190

Derivatives not in designated fair value hedge relationships 35 35 (57) (57) 60 60 (50) (50)

Commission 190 190 269 269 Other 151 - 138 -

341 190 407 269



Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Staff costs (Note 7) 5,957 5,957 6,726 6,694 Other expenses 4,298 4,251 4,612 4,543

10,255 10,208 11,338 11,237 Other expenses include: Auditor’s remuneration (excluding VAT): Audit fees: Audit of parent and Group by parent auditors 109 109 86 86 Audit of subsidiaries 10 - 10 - Non-audit fees: Other services 47 47 98 98

Amounts payable under operating leases 72 72 152 152

Number Number Number NumberFull Time:Principal office and administration centre 75 75 74 73 Branch offices 30 30 34 34

105 105 108 107

Part Time:Principal office and administration centre 32 32 31 31 Branch offices 30 30 38 38

62 62 69 69

£000 £000 £000 £000The aggregated costs of these persons were as follows:Wages and salaries 5,048 5,048 5,960 5,930 Social security costs 408 408 356 354 Other pension costs 501 501 410 410

5,957 5,957 6,726 6,694

The average number of persons employed by the Group and Society (including Executive Directors) during the year was as follows:

Total Directors’ emoluments amounted to £760k (£579k: 2016) including zero (£143k: 2016) in respect of compensation for loss of office. Full details are given in the Directors’ Remuneration Report on pages 28 to 30.

During the year the role of Chief Executive was held by Mike Kirsch on an interim basis until 5 April 2017. Mike was not a Director of the Society and his services were provided by Odgers Berndtson, who invoiced £69k exclusive of VAT during 2017. During the year the role of Finance Director was held by Richard Jones on an interim basis until 30 January 2017. Richard was not a Director of the Society and his services were provided by Odgers Berndtson, who invoiced £26k exclusive of VAT during 2017.

At 31 December 2017 there was 1 (2: 2016) outstanding loan granted in the ordinary course of business to Directors amounting to £91k (£147k: 31 December 2016). A register is maintained at the Head Office of the Society which shows details of all loans, transactions and arrangements with connected persons. A statement for the current financial year of the appropriate details contained in the register will be available for inspection at the Head Office for a period of 15 days up to and including the Annual General Meeting.

6. ADMINISTRATIVE EXPENSES

7. STAFF NUMBERS AND COSTS

8. EMOLUMENTS OF AND TRANSACTIONS WITH DIRECTORS




9. TAX ON PROFIT ON ORDINARY ACTIVITIES

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Current tax:Current tax on income for the period 864 810 182 137Adjustments in respect of prior periods (37) (37) (43) (43)Total current tax 827 773 139 94

Deferred tax:Origination and reversal of timing differences 215 215 (84) (84)Adjustment in respect of previous years (4) (4) (156) (156)Total deferred tax 211 211 (240) (240)Tax on profit on ordinary activities 1,038 984 (101) (146)

2017 2016Group Current

tax £000

Deferred tax

£000

Total tax

£000

Current tax

£000

Deferred tax

£000

Total tax

£000Recognised in profit and loss 827 71 898 139 (137) 2 Recognised in other comprehensive income - 140 140 - (103) (103)Total tax 827 211 1,038 139 (240) (101)

2017 2016Society Current

tax £000

Deferred tax

£000

Total tax

£000

Current tax

£000

Deferred tax

£000

Total tax

£000Recognised in profit and loss 773 71 844 94 (137) (43)Recognised in other comprehensive income - 140 140 - (103) (103)Total tax 773 211 984 94 (240) (146)

Factors affecting tax charge for the year The tax assessed for the year differs to the standard rate of Corporation Tax in the UK 19.25% (20%: 2016) The differences are explained below:

The Group expects its effective tax rate in future years to be broadly in line with the standard rate of Corporation Tax in the UK.

The movements in deferred taxation are disclosed in Note 27.

Total tax reconciliation Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Profit on ordinary activities before tax 4,114 3,852 1,099 873 Corporation tax at 19.25% (20%: 2016) 792 742 220 175 Effects of:Adjustment to tax charge in respect of previous periods (39) (39) (199) (199)Tax rate changes - - 20 20 Income not taxable - - (80) (80)Expenses not deductible 145 141 41 41 Total tax expense on profit on ordinary activities (see above) 898 844 2 (43)



The Society has accessed £30m of funding under the Funding for Lending Scheme of the Bank of England in the form of 9 month Treasury Bills that are held off balance sheet that had a maturity of 5 weeks at 31 December 2017.

The totals for cash and cash equivalents included in the cash flow statements for each year comprise the following balances:

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Treasury Bills - - 10,002 10,002Gilts 4,021 4,021 4,129 4,129

4,021 4,021 14,131 14,131

Movements during the year of debt are analysed as follows:

At 1 January 14,131 14,131 30,024 30,024 Additions 9,980 9,980 10,000 10,000 Disposals (20,046) (20,046) (26,000) (26,000) Net (loss)/gain from changes in fair value recognised in other

comprehensive income (44) (44) 107 107

At 31 December 4,021 4,021 14,131 14,131

Group 2017 £000

Group 2016 £000

Cash in hand and balances with the Bank of England 96,713 72,590Loans and advances to credit institutions Repayable on demand 10,277 6,563

106,990 79,153

Repayable on demand 10,277 10,022 6,563 6,312Cash pledged as collateral against derivative contracts 2,926 2,926 3,612 3,612Other loans and advances 256 256 234 234

13,459 13,204 10,409 10,158

10. TREASURY BILLS AND SIMILAR SECURITIES

11. LOANS AND ADVANCES TO CREDIT INSTITUTIONS




12. DEBT SECURITIES

13. DERIVATIVE FINANCIAL INSTRUMENTS

Group and Society

Liquid assets classified as financial fixed assets are held with the intention of use on a continuing basis in the Group’s activities except where sale is required for regulatory realisation testing. The Group holds no securities for trading purposes.

The Society has pledged as collateral £106m of mortgages to the Bank of England under the Funding for Lending Scheme and the Term Funding Scheme.

Movements during the year of debt securities held as financial fixed assets are analysed as follows:

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Issued by UK banks and building societies 11,550 11,550 12,529 12,529Issued by multilateral European development bank 4,026 4,026 4,017 4,017

15,576 15,576 16,546 16,546

Transferable debt securities comprise: Listed on a recognised investment exchange 15,576 15,576 16,546 16,546

Transferable securities held as financial fixed assets at fair value 15,576 15,576 16,546 16,546

Contractual amount

£m

Fair value – assets

£000

Fair value – liabilities

£000At 31 December 2017 Unmatched derivatives - interest rate swaps 9 26 (21) Derivatives designated as fair value hedges – interest rate swaps 211 656 (913)

220 682 (934)At 31 December 2016 Unmatched derivatives - interest rate swaps 23 3 (60) Derivatives designated as fair value hedges – interest rate swaps 142 91 (1,810)

165 94 (1,870)

At 1 January 16,546 16,546 20,201 20,201Additions 3,504 3,504 8,000 8,000Disposals and maturities (4,506) (4,506) (11,677) (11,677)Net gains from changes in fair value recognised in other comprehensive income 32 32 22 22

At 31 December 15,576 15,576 16,546 16,546

14. LOANS AND ADVANCES TO CUSTOMERS

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Loans fully secured on residential property 757,204 752,939 689,129 684,579Loans fully secured on land 6,477 6,477 7,160 7,160

763,681 759,416 696,289 691,739



15. ALLOWANCE FOR IMPAIRMENT

Loans fully secured on residential property

Loans fully secured on land Total

Individual Collective Individual Collective Individual CollectiveGroup £000 £000 £000 £000 £000 £000

At 1 January 2017 111 950 427 19 538 969 Net of write-offs and recoveries (16) (62) - - (16) (62)

95 888 427 19 522 907

Impairment allowance net of recoveries 7 (264) (15) (10) (8) (274)

At 31 December 2017 102 624 412 9 514 633

SocietyAt 1 January 2017 111 930 427 19 538 949 Net of write-offs and recoveries (16) (62) - - (16) (62)

95 868 427 19 522 887

Impairment allowance net of recoveries 7 (264) (15) (10) (8) (274)

At 31 December 2017 102 604 412 9 514 613

These provisions have been deducted from the appropriate loans in the Statement of Financial Position.




16. INVESTMENT IN SUBSIDIARY UNDERTAKINGS

The Society has the following subsidiary undertakings in which it directly holds all of the issued shares at a total cost of £6. Each is a company within the meaning of the Companies Act 2006 and is incorporated in the United Kingdom.

With the exception of Furness Mortgage Services Limited, none of the subsidiary undertakings carried on business during the year. The principal activity of Furness Mortgage Services Limited is management of secondary mortgage portfolios in the United Kingdom.All of the Society’s subsidiary companies share the same registered address as the Society.

Society 2017 £000

Society 2016 £000

Loan to subsidiary undertaking 2,561 2,964

Movements at cost in the above loan during the year are as follows:At 1 January 2,964 3,844Advances - - Repayments (403) (880)At 31 December 2,561 2,964

Group and Society Software £000

Cost At 1 January 2017 3,452 Additions 51 At 31 December 2017 3,503

Depreciation At 1 January 2017 1,871 Charges in year 623 At 31 December 2017 2,494

Net book value At 31 December 2017 1,009 At 31 December 2016 1,581

Company Name Class of Share Held

Society’s Interest

Cost

SharesFurness Mortgage Services Limited Ordinary 100% £1Furness Independent Financial Advisers Limited Ordinary 100% £1Furness Authorised Financial Advisers Limited Ordinary 100% £1Furness Financial Advisers Limited Ordinary 100% £1Furness Financial Services Limited Ordinary 100% £1Ultimate Mortgages Limited Ordinary 100% £1

17. INTANGIBLE ASSETS



Following a review of the Group’s freehold premises in the year, the Society has reassessed both the carrying value and expected useful life of its freehold buildings as at 31 December 2017. The results of the reassessment are as follows: • The carrying value of freehold buildings and related fixtures and fittings has been reduced and an impairment loss of £654k has been

recognised as ‘Depreciation and Amortisation’ in the Statement of Comprehensive Income. • The impairment reflects a lower expectation of both the future value and residual useful life of freehold buildings and has been

calculated as the higher of fair value less costs to sell and value in use (service potential) in accordance with FRS 102. • The key judgement in the calculation is the recoverable amount of the buildings based on external expert advice.

18. TANGIBLE FIXED ASSETS

19. OTHER ASSETS

Group and Society

Land & Buildings

£000

Equipment, Fixtures,

Fittings & Vehicles

£000

Total £000

Cost At 1 January 2017 1,427 5,683 7,110 Additions - 91 91 Disposals - (333) (333) At 31 December 2017 1,427 5,441 6,868

Depreciation At 1 January 2017 655 4,528 5,183 Charges in year 24 304 328 Impairment charges 358 296 654 Disposals - (235) (235) At 31 December 2017 1,037 4,893 5,930

Net book value At 31 December 2017 390 548 938 At 31 December 2016 772 1,155 1,927

The net book value of land and buildings comprises:

Group and Society

2017 £000

Group and Society

2016 £000

Freehold 390 772 Short lease (less than 50 years unexpired) - -

390 772

Land and buildings occupied by the Group/Society for its own activities 313 692

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Due within one year:Others 1,253 1,153 713 699 Due after one year:Deferred tax asset (Note 27) 915 911 1,127 1,123

2,168 2,064 1,840 1,822




20. PREPAYMENTS AND ACCRUED INCOME

21. SHARES

22. AMOUNTS OWED TO CREDIT INSTITUTIONS

23. AMOUNTS OWED TO OTHER CUSTOMERS

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Rent and rates paid in advance 29 29 60 60Fees and subscriptions paid in advance 161 161 248 248IT support fees paid in advance 260 260 248 248Other 52 52 49 49

502 502 605 605

Held by individuals 682,384 682,384 678,252 678,252Other shares 270 270 300 300

682,654 682,654 678,552 678,552

Other liabilities comprise: Corporation Tax 576 555 25 - Other creditors 475 450 469 440

1,051 1,005 494 440

Amounts owed to other customers 122,237 122,237 57,137 57,137122,237 122,237 57,137 57,137

Amounts owed to credit institutions 14,044 14,044 3,011 3,011 14,044 14,044 3,011 3,011

Included in the amounts above for 2017 is £45m borrowed from the Bank of England under the Term Funding Scheme.

24. OTHER LIABILITIES



Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Staff related costs 307 307 72 72 Audit fees 66 54 79 67 Other admininistrative costs 465 464 277 277 Other operating charges 391 391 276 276 Others 215 205 55 52

1,444 1,421 759 744

FSCS Levy

£000

Regulatory

£000

Loss of Office

£000

Onerous Leases

£000

Total £000

At 1 January 2017 185 31 160 354 730 Amounts charged/(released) in the year 5 115 - (113) 7 Amounts paid in the year (131) (9) (160) (60) (360)At 31 December 2017 59 137 - 181 377

Financial Services Compensation Scheme (FSCS) LevyThe FSCS charge is made up of the Management Expenses Levy (MEL), which covers the administrative costs of the FSCS scheme and the interest in respect of the funds borrowed from HM Treasury.

Under the terms of IFRIC 21 an accrual should only be made in the year to which the charge applies. As a result of adopting IFRIC 21 the only accrual required is for the MEL for the current financial year.

At 31 December 2017 the Society has provided £59k in respect of the MEL for 2017. This is the Society’s best estimate, calculated by reference to the protected deposits it held at 31 December 2016, the FSCS’s latest estimates of the management expenses levy for the scheme year 2017/18 and estimated LIBOR rates. This has resulted in a net charge for the Statement of Comprehensive Income of £5k.

RegulatoryThis provision relates to compensation that may be payable to customers as a result of previous business activity. The increase in the provision in 2017 principally results from the reassessment of liabilities for potential customer settlements relating to both Mortgage Payment Protection Insurance (MPPI), in light of the recently announced 2019 deadline, and the Financial Conduct Authority’s latest guidance (FG17/4) on the fair treatment of mortgage customers in payment shortfall. Compensation for loss of officeThis provision related to compensation payable to a Director who announced his retirement from the Society in 2017, and with whom a settlement was agreed between the Society and the Director as noted in the Directors’ Remuneration Report. Onerous leasesThis provision relates to onerous lease costs associated with the closure of two branches in 2016.

25. ACCRUALS AND DEFERRED INCOME

26. PROVISIONS FOR LIABILITIES

Group and Society




27. DEFERRED TAXATION ASSET

28. SUBORDINATED LIABILITIES

29. FINANCIAL COMMITMENTS

30. FINANCIAL INSTRUMENTS

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

The elements of deferred taxation are as follows: Difference between accumulated depreciation and

amortisation and capital allowances (52) (56) (135) (139)

Deferred tax asset relating to FRS 102 transition 234 234 268 268 Deferred tax asset relating to pension liabilities 733 733 994 994

915 911 1,127 1,123

At 1 January 1,127 1,123 885 882 Amount (released) to Statement of Comprehensive Income (211) (211) 242 241 At 31 December 915 911 1,127 1,123

The deferred tax asset as at 31 December 2017 has been calculated using the rates substantively enacted for the expected periods of utilisation of 17% (17%: 2016).

Future minimum lease payments under non-cancellable operating leases:Land and Buildings

With the prior consent of the Prudential Regulation Authority the Society can prepay all outstanding drawings five years before the final repayment date. Subordinated liabilities are unsecured and denominated in sterling. Interest rate payments are made at an agreed margin above the standard variable mortgage rate of the top five building societies ranked by asset size. The rights of repayment of the holders of subordinated debt are subordinated to the claims of all depositors, creditors and investing members of the Society.

Sterling subordinated loan repayable 25 June 2022 5,000 5,000 5,000 5,000Less unamortised issuance costs (14) (14) (14) (14)

4,986 4,986 4,986 4,986

Amounts payable within one year 118 118 111 111 Amounts payable within one to five years 410 410 260 260 Amounts payable after five years 274 274 119 119

802 802 490 490

A financial instrument is a contract which gives rise to a financial asset of one entity and a financial liability of another entity. The Group is a retailer of financial instruments in the form of mortgages and savings. The Group also uses wholesale financial instruments to invest liquid asset balances, raise wholesale funding and to manage the risks arising from its operations.

The Group has a formal structure for managing risk, including establishing risk limits, reporting lines, mandates and other control procedures. The structure is reviewed regularly by the Society’s Assets and Liabilities Committee, which is charged with the responsibility for managing the Group’s balance sheet exposure and the use of financial instruments for risk management purposes.

Instruments used for risk management purposes include derivative financial instruments (‘derivatives’), which are contracts or agreements whose value is derived from one or more underlying price, rate or index inherent in the contract or agreement, such as interest rates.



Measured at amortised cost Measured at fair value

At 31 December 2017 Loans and receivables

£000

Financial liabilities at

amortised cost £000

Available-for-sale

£000

Derivatives designated

as FVTPL hedges

£000

Unmatched derivative

£000

Total £000

Financial assetsCash in hand - 96,713 - - - 96,713Treasury Bills and Gilts - - 4,021 - - 4,021Loans and advances to credit institutions 13,459 - - - - 13,459Debt securities - - 15,576 - - 15,576Derivative financial instruments - - - 656 26 682Loans and advances to customers 763,681 - - - - 763,681Total financial assets 777,140 96,713 19,597 656 26 894,132Non-financial assets - 4,617 - - - 4,617Total assets 777,140 101,330 19,597 656 26 898,749

Financial liabilitiesShares - 682,654 - - - 682,654Amounts owed to credit institutions - 14,044 - - - 14,044Amounts owed to other customers - 122,237 - - - 122,237Derivative financial instruments - - - 913 21 934Subordinated Liabilities - 4,986 - - - 4,986Total financial liabilities - 823,921 - 913 21 824,855Non-financial liabilities - 7,186 - - - 7,186Total liabilities - 831,107 - 913 21 832,041

Derivatives Derivatives used by the Group are exclusively interest rate swaps used to hedge Group balance sheet exposures arising from fixed rate mortgage lending and savings products. The Board of Directors has authorised the use of derivatives in accordance with the Building Societies Act 1986. Derivatives are not used in trading activity or for speculative purposes and all derivatives are therefore designated as hedging instruments. The accounting policies for hedging contracts are described in the accounting policies in Note 1. An interest rate swap is a contract to exchange one set of interest rate cash flows for another. Such swaps result in the economic exchange of interest rates. No exchange of principal takes place. Instead interest payments are based on notional principal amounts agreed at inception of the swap. The duration of the interest rate swap is generally short to medium term and their maturity profile reflects the nature of the exposures arising from the underlying business activities.

The recognition and measurement of financial instruments is set out in the Accounting Policies (Note 1). The table below shows the assets and liabilities of the Group assigned to the categories by which they are recognised and measured. The differences between Group and Society are immaterial.




Measured at amortised cost Measured at fair value

At 31 December 2016 Loans and receivables

£000

Financial liabilities at

amortised cost £000

Available-for-sale

£000

Derivatives designated

as FVTPL hedges

£000

Unmatched derivative

£000

Total £000

Financial assetsCash in hand - 72,590 - - - 72,590Treasury Bills and Gilts - - 14,131 - - 14,131Loans and advances to credit institutions 10,409 - - - - 10,409Debt securities - - 16,546 - - 16,546Derivative financial instruments - - - 91 3 94 Loans and advances to customers 696,289 - - - - 696,289Total financial assets 706,698 72,590 30,677 91 3 810,059Non-financial assets - 5,953 - - - 5,953Total assets 706,698 78,543 30,677 91 3 816,012

Financial liabilitiesShares - 678,552 - - - 678,552Amounts owed to credit institutions - 3,011 - - - 3,011Amounts owed to other customers - 57,137 - - - 57,137Derivative financial instruments - - - 1,810 60 1,870Subordinated Liabilities - 4,986 - - 4,986Total financial liabilities - 743,686 - 1,810 60 745,556Non-financial liabilities - 7,645 - - - 7,645Total liabilities - 751,331 - 1,810 60 753,201

Valuation of financial instruments carried at fair value The Group holds certain financial assets and liabilities at fair value, grouped into Levels 1 to 3 of the fair value hierarchy as outlined below. Fair values are determined using the following fair value hierarchy that reflects the significance of the inputs in measuring fair value: Level 1 The most reliable fair values of financial instruments are quoted market prices in an actively traded market. The Group’s Level 1

portfolio consists principally of debt securities and Treasury Bills for which traded prices are readily available.

Level 2 These are valuation techniques for which all significant inputs are taken from observable market data. These include valuation models used to calculate the present value of expected future cash flows and may be employed when no active market exists and quoted prices are available for similar instruments in active markets. We have evaluated these using estimated credit losses, interest rates and discount rates (eg yield curves). The Group’s Level 2 portfolio consists of interest rate swaps for which traded prices are readily available.

Level 3 These are valuation techniques for which one or more significant input is not based on observable market data. Valuation techniques include net present value by way of discounted cash flow models. We have no assets of this type.



The table below summarises the fair values of the Group’s financial assets and liabilities that are accounted for at fair value, analysed by the valuation methodology used by the Group to derive the financial instruments fair value:

Financial assets pledged as collateral The total financial assets recognised in the Statement of Financial Position that had been pledged as collateral for liabilities at 31 December 2017 and 2016 is shown in the following table.

Financial assets are pledged as collateral as part of the Government’s Funding for Lending Scheme and Term Funding Scheme, and for Mark To Market Movement Cash Flow obligations for Interest Rate Derivative Swap Contracts under terms that are usual and customary for such activities. In addition, as part of the Funding for Lending Scheme, the Group has received collateral that it is permitted to sell or repledge in the absence of default.

At 31 December 2017 Level 1 £000

Level 2 £000

Level 3 £000

Total £000

Financial assetsAvailable for sale Debt securities 15,576 - - 15,576 Treasury Bills & similar 4,021 - - 4,021Fair value through profit and loss Derivative financial instrument assets - 682 - 682

19,597 682 - 20,279Financial liabilitiesFair value through profit and loss Derivative financial instrument liabilities - 934 - 934

- 934 - 934

At 31 December 2016Financial assetsAvailable for sale Debt securities 16,546 - - 16,546 Treasury Bills & similar 14,131 - - 14,131Fair value through profit and loss Derivative financial instrument assets - 94 - 94

30,677 94 - 30,771Financial liabilitiesFair value through profit and loss Derivative financial instrument liabilities - 1,870 - 1,870

- 1,870 - 1,870

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Treasury Bills 3,000 3,000 5,000 5,000 Loans and advances to credit institutions 2,926 2,926 3,613 3,613 Loans and advances to customers 106,083 106,083 57,504 57,504

112,009 112,009 66,117 66,117




Credit risk

‘Credit risk’ is the risk that a borrower or counterparty of the Group will cause a financial loss for the Group by failing to discharge an obligation.

All loan applications are assessed with reference to the Group’s lending policy. Changes to policy are approved by the Board and the approval of loan applications is mandated. The Board is responsible for approving treasury counterparties.

The Group and Society enters into credit support agreements, which protect against counterparty default in respect to hedging instruments by means of collateral transactions. Collateral balances are included within ‘liquid assets’ or ‘amounts owed to credit institutions’ as appropriate and interest receivable or payable reflected on the Statement of Comprehensive Income within ‘net interest receivable’.

The Group’s maximum credit risk exposure is detailed in the table below:

Credit quality analysis of loans and advances to customers The tables below set out information about the credit quality of financial assets and the allowance for impairment/loss held by the Group against those assets.

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Cash in hand and Balances with Bank of England 96,713 96,713 72,590 72,590Treasury Bills 4,021 4,021 14,131 14,131Loans and advances to credit institutions 13,459 13,204 10,409 10,158Debt securities 15,576 15,576 16,546 16,546Derivative financial instruments 682 682 94 94Loans and advances to customers 763,681 759,416 696,289 691,739Loans to Subsidiaries - 2,561 - 2,964Total statement of financial position exposure 894,132 892,173 810,059 808,222Off balance sheet exposure – mortgage commitments 44,589 44,589 37,835 37,835

938,721 936,762 847,894 846,057

2017 2016Loans fully secured on

residential property £000

Loans fully secured on land

£000

Loans fully secured on residential property

£000

Loans fully secured on land

£000Neither past due nor impaired 702,421 4,355 633,943 5,280

Past due but not impaired30 – 60 days 50,526 1,522 47,941 1,48860 – 90 days 1,260 86 2,368 318 90 – 180 days 1,278 - 2,130 -180 days+ 896 - 952 -

ImpairedNot past due 271 - 476 7430 – 60 days - 266 - - 60 – 90 days - - - -90 – 180 days 315 - 860 - 180 days+ - - 383 - Possession 237 248 76 -

757,204 6,477 689,129 7,160

Allowance for impairmentIndividual 102 412 111 427Collective 624 9 950 19Total allowance for impairment 726 421 1,061 446



The status ‘past due but not impaired’ includes any asset where a payment due is received late or missed but no individual provision has been made against that asset. The amount included is the entire loan amount and not just the overdue amount.

Assets obtained by taking possession of collateral Details of financial and non-financial assets obtained during the year by taking possession of collateral held as security against loans and advances as well as calls made on credit enhancements and held at the year end are shown below.

The Group’s policy is to pursue timely realisation of the collateral in an orderly manner. The Group does not generally use the non-cash collateral for its own operations.

Collateral held and other credit enhancementsThe Group and Society hold collateral and other credit enhancements against certain of its credit exposures. The table below sets out the principal types of collateral held against different types of financial assets.

The tables below stratify credit exposures from mortgage loans and advances to retail customers by ranges of loan-to-value (LTV) ratio. LTV is calculated as the ratio of the gross amount of the loan – or the amount committed for loan commitments – to the value of the collateral. The gross amounts exclude any impairment allowance. The valuation of the collateral excludes any adjustments for obtaining and selling the collateral. The value of the collateral for residential mortgage loans is based on the indexed valuation.

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

LTV ratioLess than 50% 291,371 287,809 277,798 273,88251 – 70% 259,003 258,300 237,122 236,70871 – 90% 183,489 183,489 152,893 152,68191 – 100% 29,281 29,281 28,212 28,204More than 100% 537 537 264 264

763,681 759,416 696,289 691,739

Percentage of exposure that is subject to collateral requirements

Group 2017

%

Society 2017

%

Group 2016

%

Society 2016

%

Principal type of collateral

heldLoans and advances to customers 42.5 42.6 41.5 41.5 Property

Group 2017 £000

Society 2017 £000

Group 2016 £000

Society 2016 £000

Property 237 237 60 60




Forbearance A range of forbearance options are available to support customers who are in financial difficulty. The purpose of forbearance is to support customers who have temporary financial difficulties and help them get back on track. The main options offered by the Society include reduced monthly payment, an arrangement to clear outstanding arrears, capitalisation of arrears or extension of the mortgage term.The table below analyses residential mortgage borrowers with renegotiated terms at the year end date:

The cases above represent total mortgage balances of £3.3m (£5.67m: 2016).Impairment provisions of £80k in 2017 (£136k: 2016) are held in respect of these mortgages.

Liquidity risk Liquidity risk is the risk that the Society will not have sufficient financial resources available to meet its obligations as they fall due under either normal business conditions or a stressed environment. It is the Society’s policy that a significant amount of its total assets are carried in the form of cash and other readily realisable assets in order to:

i) meet day-to-day business needs; ii) meet any unexpected cash needs; iii) maintain public confidence; and iv) ensure maturity mismatches are provided for.

Monitoring of liquidity, in line with the Society’s prudent policy framework, is performed daily. Compliance with these policies is reported monthly to the Board Risk Committee. The Society’s liquidity policy is designed to ensure the Society has sufficient liquid resources to withstand a range of stressed scenarios. A series of liquidity stress tests have been developed as part of the Individual Liquidity Adequacy Assessment (ILAA) process. They include scenarios that fulfil the specific requirements of the PRA and scenarios identified by the Society which are specific to its business model. The stress tests are performed monthly to confirm that liquidity policy remains appropriate

Maturity analysis for financial assets and financial liabilities The tables below set out the remaining contractual maturities of the Group’s financial liabilities and financial assets. In practice, contractual maturities are not always reflected in actual experience. For example loans and advances to customers tend to repay ahead of contractual maturity and customer deposits (eg shares) are likely to be repaid later than on the earliest date on which repayment can be required.

Group 2017

Number

Society 2017

Number

Group 2016

Number

Society 2016

NumberArrangement 34 34 62 62Concession - - 4 4Interest Only 1 1 1 1Extension of Term 13 13 11 11Transfer to Repayment - - - - Others 13 13 13 13

61 61 91 91



Group31 December 2017

On demand

£000

Not more than three

months £000

More than three months but not

more than one year £000

More than one year but not more

than five years £000

More than five

years £000

Total£000

Financial assetsCash in hand & balances with Bank of England 96,713 - - - - 96,713

Treasury Bills - - 4,021 - - 4,021 Loans and advances to credit institutions 10,277 - - 2,926 256 13,459

Debt securities - - 3,002 12,574 - 15,576 Derivative financial instruments - - 18 664 - 682 Loans and advances to customers - 850 2,901 44,130 715,800 763,681

Total financial assets 106,990 850 9,942 60,294 716,056 894,132

Financial liabilitiesShares 627,846 10,435 25,688 18,685 - 682,654 Amounts owed to credit institutions - 2,518 11,526 - - 14,044

Amounts owed to other customers 27,434 8,778 39,476 46,549 - 122,237

Subordinated debt - - - 4,986 - 4,986 Derivative financial instruments - 9 46 879 - 934 Total financial liabilities 655,280 21,740 76,736 71,099 - 824,855


On demand

£000

Not more than three

months £000





More than five

years £000

Total£000

Financial assetsCash in hand & balances with Bank of England 72,590 - - - - 72,590

Treasury Bills - 10,002 - 4,129 - 14,131 Loans and advances to credit institutions 6,562 - - 3,613 234 10,409

Debt securities - 4,502 12,044 - 16,546 Derivative financial instruments - - - 91 3 94 Loans and advances to customers - 7,005 3,540 37,662 648,082 696,289

Total financial assets 79,152 21,509 3,540 57,539 648,319 810,059

Financial liabilitiesShares 655,249 4,530 18,615 158 - 678,552 Amounts owed to credit institutions - 2,011 1,000 - - 3,011


Subordinated debt - - - - 4,986 4,986 Derivative financial instruments - 90 193 1,587 - 1,870 Total financial liabilities 680,159 12,187 38,939 9,285 4,986 745,556




The tables below set out maturity analysis for financial liabilities that shows the remaining contractual maturities at undiscounted amounts. The analysis of gross contractual cash flows differs from the analysis of residual maturity due to the inclusion of interest accrued at current rates, for the average period until maturity on the amounts outstanding at the Statement of Financial Position date.

Market risk Market risk is the risk of changes to the Society’s financial condition caused by market interest rates. The Society is exposed to market risk in the form of changes (or potential changes) in the general level of interest rates, changes in the relationship between short and long-term interest rates and interest rates for different balance sheet elements (basis risk).

The Management of interest rate risk is based on a full Statement of Financial Position gap analysis. In addition Management review interest rate basis risk. Both sets of results are measured against the risk appetite for market risk, these are in turn reviewed monthly and reported to the Board Risk Committee.

The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Group’s financial assets and financial liabilities to various standard and non-standard interest rate scenarios. The key scenario that is considered on a monthly basis is that of a 200 basis point (bps) parallel fall or rise in the LIBOR yield curve.

The following is an analysis of the annualised impact of the Group’s sensitivity to an increase or decrease in market interest rates, assuming no asymmetrical movement in yield curves and a constant financial position.


On demand

£000

Not more than three

months £000





More than five

years £000

Total£000

Financial liabilitiesShares 627,846 10,447 25,831 19,101 - 683,225Amounts owed to credit institutions - 2,518 11,526 - - 14,044


Subordinated debt - - - 6,478 - 6,478Derivative financial instruments - 9 46 879 - 934

655,606 21,760 75,976 74,593 - 827,935Other liabilities - - 3,066 - 4,314 7,380Total financial liabilities 655,606 21,760 79,042 74,593 4,314 835,315


On demand

£000

Not more than three

months £000





More than five

years £000

Total£000

Financial liabilitiesShares 655,360 4,513 18,637 160 - 678,670Amounts owed to credit institutions - 2,012 1,003 - - 3,015


Subordinated debt - - - - 6,554 6,554Derivative financial instruments - 90 193 1,587 - 1,870

680,534 12,136 44,277 3,909 6,554 747,410Other liabilities - 13 1,970 - 5,662 7,645Total financial liabilities 680,534 12,149 46,247 3,909 12,216 755,055



Capital The Society’s policy is to maintain a strong capital base to maintain member, creditor and market confidence and to sustain future development of the business. The Society’s actual and expected capital position is reviewed against stated risk appetite which aims to maintain capital at a specific level above its Internal Capital Guidance.

The Board manages the Society’s capital and risk exposures to maintain capital in line with regulatory requirements which includes monitoring of:

Lending and Business Decisions - The Society does not use an application scorecard and underwrites each mortgage application manually, making use of an internal credit risk assessment model as part of the decision making process. Once loan funds have been advanced behavioural scorecards are used to review the ongoing risk profile of both the portfolio and individual customers. In addition, for residential and buy-to-let mortgages property values are updated on a quarterly basis.

Pricing - Pricing models are utilised for all mortgage product launches.

Concentration risk - The design of retail products takes into account the overall mix of products to ensure that exposure to market risk remains within permitted parameters.

Counterparty risk - Wholesale lending is only carried out with approved counterparties in line with the Society’s lending criteria and is subject to a range of limits. The limits are monitored daily to ensure the Society remains within risk appetite.

Market RiskGroup

200bps parallel increase

£000

200bps parallel decrease

£00031 December 2017Sensitivity of projected net interest income 433 (433)31 December 2016Sensitivity of projected net interest income 867 (867)




31. PENSIONS

The Society previously operated a defined benefit pension scheme, now closed to new entrants and further accrual, on which it recognises any gains and losses in each period in Other Comprehensive Income (OCI). The contributions are determined by a qualified actuary on the basis of triennial valuations using the projected unit method. The most recent triennial valuation was at 6 April 2014 and this identified a scheme deficit of £5.516m.

The Society’s Board and the Trustees of the defined benefit scheme are negotiating an updated schedule of payments designed to eliminate the triennial valuation deficit calculated by the actuary. This is due to be agreed during 2018.

The Society’s defined benefit scheme was closed to new entrants in September 2000 and to further accrual in December 2016. Eligible employees can join a Group Personal Pension Scheme under which the Society assists with contributions. In 2017, the Society contributed £293k to this scheme (£165k: 2016).

The Society has implemented Section 28 of FRS 102 ‘Employee Benefits’ which covers the accounting and disclosure requirements for employee pensions. In accordance with Section 28 of FRS 102 the pension liability has been shown gross of related deferred tax in the balance sheet. The scheme deficit at 31 December 2017 is £4.314m (£5.662m: 2016) before related deferred tax of £0.733m (£0.963m: 2016) and is shown in the Statement of Financial Position.

The most recent interim valuation showed that the market value of the scheme’s assets was £27.709m at 31 December 2017.

The scheme’s assets include no assets from the Society’s own financial instruments and do not include any property occupied by, or other assets used by the Society. The key assumptions used in this valuation are: Discount rate 2.5% Inflation assumption-CPI 2.1%

The expected return on the pension scheme assets has been calculated as the yield on AA rated corporate bonds of appropriate term.The post retirement mortality assumptions are based on the mortality table known as S2PMA for males and S2PFA for females with reference to members’ years of birth. Allowances have been made for improvements in mortality in the recent past and currently expected in the future. The assumptions are equivalent to expecting a 62-year old to live for a number of years as follows:

• Current pensioner aged 62: 24.8 years male, 26.7 years female. • Future retiree upon reaching 62: 26.3 years male, 28.3 years female.



The fair value of the scheme’s assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the scheme’s liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, are shown in the following tables:

The pension costs for the defined benefit scheme in the financial statements were as follows:

2017 £000

Net pension (liability)Defined benefit obligation (32,023)Plan assets 27,709 Deficit in the scheme (4,314)

Movement in deficit during the year Deficit in the scheme at beginning of year (5,662)Interest cost (150)Actuarial gain 833 Employer contributions paid (gross of charges) 698 Expenses paid by the scheme (33)Deficit in the scheme at end of year (4,314)

Changes in the fair value of scheme assets:Opening fair value of scheme assets 28,307Interest on assets 755 Gain on asset return 1,310 Contributions by employer (gross) 698 Expenses paid by Scheme (33)Benefits paid (3,328)Closing fair value of scheme assets 27,709

Changes in the present value of the defined benefit obligation:Opening defined benefit obligation 33,969Interest cost 905 Loss on changes in assumptions 477 Benefits paid (3,328)Closing defined benefit obligation 32,023

Analysis of other pension costs charged in arriving at operating profit:Scheme expenses (33)Interest on pension scheme liabilities (150)Net charge to operating profit (183)

Analysis of amount credited/(charged) through Other Comprehensive Income:Return on assets 1,310 Changes in assumptions (477)Net charge through Other Comprehensive Income 833




The fair value of the plan assets were as follows:

Principal actuarial assumptions (expressed as weighted averages) at the year end:

The return on the scheme’s invested assets over the year was 7.7%, equivalent to £2.065m in monetary terms. The total actuarial gain recognised in Other Comprehensive Income in 2017 was £0.833m (£1.589m loss: 2016).

The Group has taken exemption as provided in section 33.1A of FRS 102 and does not disclose transactions with members of the same Group that are wholly owned. The Group would disclose transactions with related parties which are not wholly owned with the same Group; however, during the year under consideration, there have been no such related party transaction which needs to be disclosed.

As at 31 December 2017 the Society had a loan outstanding to its subsidiary, Furness Mortgage Services Limited, of £2.478m (£2.868m: 2016).

The Society was owed £0.083m by its subsidiary Furness Financial Advisers Limited (£0.096m: 2016).

See Note 8 for disclosure of Directors’ emoluments and details of transactions with Directors.

2017 Fair value

£000

2016 Fair value

£000Equities 12,950 14,475Bonds 13,084 11,526Other 1,675 2,306

27,709 28,307

2017 2016Discount rate 2.5% 2.8%Mortality rates change - Male aged 62 (1.3) (0.2)Mortality rates change - Female aged 62 (0.4) (0.2)Inflation - RPI 3.1% 3.3%Inflation - CPI 2.1% 2.3%

32. RELATED PARTY TRANSACTIONS



Annual Business StatementFor the year ended 31 December 2017

The above percentages have been prepared from the Group’s accounts.

The percentages are calculated in accordance with, and the statutory limits are those prescribed by, sections 6 and 7 of the Building Societies Act 1986.

Business assets are the total assets of the Group as shown in the Statement of Financial Position plus impairment allowance on loans and advances to customers, less fixed assets and liquid assets.

Loans fully secured on residential property are the amount of principal owing by borrowers and interest accrued not yet payable. This is the amount shown in the Statement of Financial Position plus impairment allowance on loans and advances to customers.

The above percentages have been prepared from the Group’s financial statements.

‘Shares and borrowings’ represent the total of shares, amounts owed to credit institutions and amounts owed to other customers.

‘Gross capital’ represents aggregated reserves and subordinated liabilities as shown in the Group Statement of Financial Position.

‘Free capital’ is gross capital plus collective impairment on loans and advances less tangible and intangible fixed assets in the Group Statement of Financial Position.

‘Mean total assets’ represent the average of total assets at the beginning and end of the financial year for the Group.

‘Liquid assets’ represent the total of cash in hand and balances with the Bank of England, loans and advances to credit institutions, debt securities and Treasury Bills.

‘Management expenses’ are the aggregate of administrative expenses and depreciation and amortisation taken from the Group Statement of Comprehensive Income.

1. STATUTORY PERCENTAGES

2. OTHER PERCENTAGES Summary of Key Financial Ratios

At 31.12.2017 At 31.12.2016 Statutory Limit

Proportion of business assets not in the form of loans fully secured on residential property (the ‘lending limit’) 1.34% 1.45% 25%

Proportion of shares and borrowings not in the form of shares held by individuals (the ‘funding limit’) 16.67% 8.18% 50%

2017 %

2016 %

Gross capital as a percentage of shares and borrowings 8.76 9.18

Free capital as a percentage of shares and borrowings 8.56 8.83

Liquid assets as a percentage of shares and borrowings 15.85 15.39

Profit for the year as a percentage of mean total assets 0.38 0.13

Management expenses as a percentage of mean total assets 1.38 1.44




3. DIRECTORS AS AT 31 DECEMBER 2017

4. OTHER OFFICERS

5. PARTICULARS OF DIRECTORS’ SERVICE CONTRACTS

Name Age Date of Appointment

Business Occupation Other Directorships

C S Millar 71 19/09/06 Company Director

K S Kearney 61 27/09/11 Company Director Partner in Town End Alpacas

A J Haigh 64 10/01/14 Company Director Calderdale and Huddersfield NHS Foundation Trust

N J Gower 58 20/05/14 Company DirectorSeashell Trust LimitedManchester University NHS Foundation TrustGovernor, Royal School Manchester

K L Rebecchi 51 05/01/16 Company DirectorBusiness Enterprise Fund LtdRedmayne-Bentley Stockbrokers LLPBank of Cyprus UK

P A McLelland 51 26/10/16 Finance Director

Cheque Exchange LimitedProvident Financial Management Services LimitedGreenwood Personal Credit LimitedN&N Simple Financial Solutions LimitedProvident Personal Credit Limited

C M Harrison 56 06/04/17 Chief ExecutiveFurness Financial Advisers LimitedFurness Mortgage Services Limited

M J Dobson 41 30/01/17 Finance DirectorFurness Financial Advisers LimitedFurness Mortgage Services LimitedQuay View Residents Ltd

S J Heron 54 24/06/15 Marketing & Sales Director

Furness Authorised Financial Advisers Limited Furness Financial Advisers LimitedFurness Financial Services LimitedFurness Independent Financial Advisers Limited Furness Mortgage Services LimitedUltimate Mortgages Limited

Name Age Date of Appointment

Business Occupation Other Directorships

P A Mawson 47 03/07/15 Chief Compliance Officer & Group

Secretary

Furness Authorised Financial Advisers Limited Furness Financial Advisers LimitedFurness Financial Services LimitedFurness Independent Financial Advisers Limited Furness Mortgage Services LimitedUltimate Mortgages Limited

Annual Business Statement continued

Details of Directors’ service contracts can be found in the Directors’ Remuneration Report on pages 28 to 30.



Auditor KPMG LLP 1 Sovereign Square, Sovereign Street, Leeds LS1 4DABankers National Westminster Bank plc & The Royal Bank of Scotland plc

Furness Building Society Reg No. 221 B; Registered Office: 51-55 Duke Street, Barrow-in-Furness, Cumbria LA14 1RT

Head Office 51-55 Duke Street, Barrow-in-Furness, Cumbria LA14 1RT

Telephone: (01229) 824560 Fax: (01229) 837043

E-mail: [email protected] Website: www.furnessbs.co.uk

Authorised by the Prudential Regulation Authority and regulated by the Prudential Regulation Authority and the Financial Conduct Authority and entered in the Financial Services Register under number 159624




Furness Building Society is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Furness Building Society is on the Financial Services Register under registration number 159624. The Society is covered by the Financial Ombudsman Service and has a complaints handling procedure. A copy of the complaints handling procedure is available on request. Complaints we cannot settle may be referred to the Financial Ombudsman Service. Your call may be monitored or recorded to maintain a quality service.


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